A process which causes average costs to increase as output rises. It will occur when output rises above the level at which capacity is exceeded.
Below is a diagram to illustrate that as the size and scale of a firm and their output increases beyond an optimal point the firm inadvertently causes its own costs to rise. This is highlighted by the SRAC curves shifting up the LRAC as the scale of the firm increases. This shows that all firms have a capacity in which no more cost advantages are available i.e. increasing the scale and size of the firm has no beneficial effect on the firm e.g. a barber's shop in a small town.
