# Law of Returns to Scale

Topics: Returns to scale, Economics of production, Function Pages: 3 (704 words) Published: June 12, 2013
The laws of return to scale explain the behavior of output in response to a proportional and simultaneous change in input. Increase in inputs proportionately and simultaneously is in fact expansion of the scale of production. Statement: “As a firm in the long run increases the quantities of all factors employed, other things being equal, the output may rise initially at a more rapid rate than the rise of increase in inputs, then output may increase in the same proportion of input, and ultimately, output increases less proportionately.” Assumptions:

1. Technique of production is unchanged.
2. All units of factors are homogeneous.
3. Returns are measured in physical terms.

There are three kinds of returns to scale:
1. Increasing returns to scale.

Increasing returns to scale
The law of increasing returns describes increasing returns to scale. There are increasing returns to scale when a given percentage increase in input will lead to a greater relative percentage increase in the resultant output.

From the fig when inputs K and L, are increased at a certain proportion and output increases more than proportionately, it exhibits increasing returns to scale. If quantities of both the inputs, K and L, are successively doubled and the resultant output is more than doubled, the return to scale is said to be increasing the movement from point a to b on the line OB means doubling the input. It can be seen that input-combination increases from 1K+1L to 2K+2L. As a result of doubling the inputs, output is more than doubled: it increases from 10 to 25 units, i.e., an increase of 150%. Similarly, the movement from point B to point C indicates 50% increase in inputs as a result of which the output increases from 25 units to 50 units i.e., 100%. Clearly, output increases more than the proportionate increase in inputs. The reasons for increasing returns to...