ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A publishing company has grown so large that communication between departments is slow, decisions take longer and staff motivation has fallen, causing its average cost per book to rise. Which term best describes this situation?
The situation describes diseconomies of scale. Beyond a certain size, communication problems, slow decision-making and poor motivation raise the average cost per unit, so further growth increases rather than reduces unit costs.
- ADiseconomies of scaleCorrect
- BEconomies of scope
- CIncreasing returns to scale
- DVertical integration
Explanation
When growth causes coordination, communication and motivation problems that push average cost up, the firm suffers diseconomies of scale. Increasing returns to scale would lower average costs. Economies of scope and vertical integration do not describe rising average costs from size.
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