Which term describes the cost disadvantages of growth where unit costs rise as a firm grows?

• A. barriers to entry
• B. diseconomies of scale
• C. external growth
• D. economies of scale

Answer: (B)

As a firm grows, its systems and processes can become stretched. When output increases beyond the point where management and operations can coordinate efficiently, per-unit costs start to rise due to factors like communication breakdowns, longer decision chains, and more bureaucracy. This rise in average cost with increasing size is known as diseconomies of scale.

Barriers to entry aren’t about how costs move with scale; they’re obstacles that prevent new competitors from entering the market. External growth refers to expanding through mergers or acquisitions with other firms, not how costs behave internally as output climbs. Economies of scale describe the opposite effect—average costs falling as output rises due to spreading fixed costs, bulk buying, and increased specialization.