Laws Of Returns To Scale | Laws Of Returns To Scale Note For BCom Under Dibrugarh University

Discuss laws of returns to scale. How are laws of returns to scale different from laws of variable proportions?

LAW OF RETURNS TO SCALE: It is a Long run concept. All factors of production are variable in the long period. No factor is a fixed factor. Accordingly, scale of production can be changed by changing the quantity of all factors.

 According to Koutsoyiannis “The term returns to scale refers to the changes in output as all factors change by the same proportion.”

There are three aspects to Laws of Return to Scale:
a) Increasing Return to Scale.
b) Constant Returns to Scale.
c) Diminishing Returns to Scale.

Increasing Returns to Scale: When inputs are increased in a given proportion and output increases in a
greater proportion, the returns to scale are said to be increasing. In other words, proportionate increase in all factors of production results in a more than proportionate increase in output It is a case of increasing returns to scale. Thus, if by 100 percent increase in factors of production, output increases by 120 percent or more, it will bean instance of increasing returns to scale.

      If the industry is enjoying increasing returns, then its marginal product increases. As the output expands, marginal costs come down. The price of the product also comes down.

Constant Return to Scale: When inputs are increased in a given proportion and output increases in the same proportion, constant return to scale is said to prevail. For example, if inputs are increased by 25% and output also increases by 25%, the return to scale are said to be constant (= 1).This may be called homogeneous production function of the first degree.In case of constant returns to scale the average output remains constant. Constant returns to scale operate when the economies of the large scale production balance with the diseconomies.

Related Topic: 

Decreasing Returns to Sale: Decreasing returns to scale is otherwise known as the law of diminishing
returns.This is an important law of production. If the 
firm continues to expand beyond the stage of constant returns, the stage of diminishing returns to scale will start operate. A proportionate increase in all inputs results in less than proportionate increase in output, the returns to scale is said to be decreasing. For example, if inputs are increased by 20%, but output increases by only 10%, (= < 1), it is a case of decreasing return to scale. Decreasing return to scale implies increasingcosts to scale.

Also Read:  What are Economics Scale? Discuss about internal economics and external economics.

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