EXTERNAL DISECONOMIES OF SCALE

External factors beyond the control of a company increases its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production.

Factors of production are the inputs that firms use in order to produce output. The inputs include land, labor and capital. Some economists include entrepreneurship as well.

For example, assume there is a manufacturer of 'widgets' in a given city. If the average wage level increases across all other markets as a result to an increased demand for labor, then to entice workers to produce “widgets”, the manufacturer must pay more in wages, which will raise the total costs.