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The opposite of economies of scale, diseconomies of scale occur when average total cost (ATC) begins to rise because of the size of the company. Average total cost is defined simply as total costs divided by output, so it is the cost per unit of output.

The main cause of this is communication failure - when a company becomes too large, there are many layers of management between the shop floor and the board of directors. This leads to resources not being allocated as effectively as they could be, and often has a retardant effect on the decision-making process, because so many individuals are involved in it. It's a common criticism of large companies that the managers and directors are not "in touch" with the real situation of the company.

Diseconomies of scale occur later in large companies that are simply mass-producing a standardised product than in smaller ones that need to meet each customers' requirements exactly because they are more capable of running from habit and inertia, so the retarded decision-making process doesn't affect them as much.

The best level of output for a company is the point at which economies of scale have ceased to give any further benefit, and just before diseconomies of scale set in. This point is referred to as the minimum efficient scale of output. On an ATC graph this is the bottom of the parabola.

Sometimes a company might go so far as splitting into a conglomerate to combat diseconomies of scale - this involves splitting the company into a group of smaller companies with their own board of directors, so things can hopefully be run more efficiently by people able to concentrate just on their specific part of the whole.

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