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.
2. Constant return to scale.
3. Diminishing return 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...
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