Final answer:
Decreasing returns to scale, known as diseconomies of scale, occur when a company's average costs increase as output increases, often due to management inefficiencies and complex operations which may set in beyond a certain scale of production.
Step-by-step explanation:
Decreasing returns to scale, or diseconomies of scale, occur in a business context when a company's average costs increase as its output increases. This happens when the cost advantages of producing at a large scale are outweighed by the inefficiencies that arise as a company grows too large. For instance, diseconomies of scale may occur due to increased bureaucracy, communication challenges, or supply chain complexities.
The concept of economies of scale, where average costs decline with increased production, contrasts with diseconomies of scale. An example is provided by the airplane manufacturing industry. In this industry, as outlined in Production, Cost and Industry Structure, economies of scale might be observed up to a certain point, after which diseconomies of scale set in. This happens when production exceeds a threshold, such as 20,000 airplanes per year, leading to rising average costs.