external diseconomies of scale

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These arise when the entry of new firms into an industry causes the minimum average total cost of all firms in the industry to rise. This occurs when input prices are driven up as the demand for specialized inputs increases. Through this mechanism an expansion of the industry (but not of an individual firm) causes minimum average total cost to rise for all firms in the industry. The industry long-run supply curve therefore slopes upwards.

Subjects: Economics.

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