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# Returns to scale and its implications

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### Returns to scale and its implications

1. 1. Prof. M.P. Rege
2. 2. <ul><li>ANSARI BUSHRA 03 </li></ul><ul><li>VISHAL JADHAV 13 </li></ul><ul><li>SALMAN KHATRI 23 </li></ul><ul><li>MOMIN SAUD AHMED 33 </li></ul><ul><li>MOHAMMED ISMAIL SAYYED 43 </li></ul><ul><li>SOHINI SURANI 53 </li></ul>
3. 4. <ul><li>Production implies provision of goods and services, often described as ‘Commodities’. </li></ul>
4. 5. <ul><li>A production function refers to the functional relationship, under the given technology, between physical rates of input & output of a firm, per unit of time. </li></ul><ul><li>Q = f(L, M, N,K,T) </li></ul>
5. 6. TYPES OF PRODUCTION FUNCTION <ul><li>SHORT RUN PRODUCTION </li></ul><ul><li>1 variable constant </li></ul><ul><li>Works in tandem with Laws of variable Proportions </li></ul><ul><li>3 Stages – </li></ul><ul><li>Increasing returns </li></ul><ul><li>Diminishing returns </li></ul><ul><li>Negative returns </li></ul><ul><li>LONG RUN PRODUCTION </li></ul><ul><li>Both Variables </li></ul><ul><li>Works in tandem with Laws of returns to scale </li></ul><ul><li>3 Stages – </li></ul><ul><li>Increasing returns to scale </li></ul><ul><li>Constant returns to scale </li></ul><ul><li>Diminishing returns to scale </li></ul>
6. 8. <ul><li>In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). </li></ul><ul><li>It is a long run production function </li></ul><ul><li>Q = f(a1,b1,c1,.....,n,T) </li></ul>
7. 9. <ul><li>Technique of production is unchanged </li></ul><ul><li>All units of factors are homogenous </li></ul><ul><li>Returns are measured in physical terms </li></ul>
8. 10. <ul><li>Increasing returns to scale </li></ul><ul><li>Constant returns to scale </li></ul><ul><li>Decreasing returns to scale </li></ul>
9. 11. <ul><li>Increasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a greater than proportional increase in production. </li></ul>SCALE OF PRODUCTION MARGINAL RETURN
10. 12. <ul><li>Technical and managerial indivisibilities </li></ul><ul><li>Higher degree of specialization </li></ul><ul><li>Dimensional relations </li></ul>
11. 13. <ul><li>Constant returns to scale occurs if a proportional increase in all inputs under the control of a firm results in an equal proportional increase in production. </li></ul>SCALE OF PRODUCTION MARGINAL RETURN
12. 14. <ul><li>Indivisibility of fixed factors. </li></ul><ul><li>When the factors of production are perfectly divisible, the production function is homogenous of degree 1 showing constant returns to scale. </li></ul>
13. 15. <ul><li>Decreasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a less than proportional increase in production. </li></ul>SCALE OF PRODUCTION MARGINAL RETURN
14. 16. <ul><li>Size of the firms expands, managerial efficiency decreases. </li></ul><ul><li>Limited resources. </li></ul>
15. 17. An economy of scale exists when larger output is associated with lower per unit cost.
16. 18. ECONOMIES OF SCALE <ul><li>Labour economies </li></ul><ul><li>Technical Economies </li></ul><ul><li>Marketing Economies </li></ul><ul><li>Managerial Economies </li></ul>
17. 19. A diseconomy of scale exists when larger output leads to higher per unit cost.
18. 20. DISECONOMIES OF SCALE <ul><li>Managerial Diseconomies </li></ul><ul><li>Marketing Diseconomies </li></ul><ul><li>Technical Diseconomies </li></ul>
19. 21. ECONOMIES OF SCALE, DISECONOMIES OF SCALE & RETURNS TO SCALE <ul><li>Returns to scale are the flip slide of economies of scale and diseconomies of scale. However, whereas economies and diseconomies of scale focus on cost, returns to scale focus on production. </li></ul>
20. 22. <ul><li>Economies of scale indicate that long-run average cost decreases, which corresponds to increasing returns to scale in terms of production. </li></ul><ul><li>Diseconomies of scale indicate that long-run average cost increases, which corresponds to decreasing returns to scale in terms of output. </li></ul><ul><li>Constant returns to scale for production terms results when long-run average cost neither increases nor decreases. </li></ul>ECONOMIES OF SCALE, DISECONOMIES OF SCALE & RETURNS TO SCALE
21. 23. LIMITATION OF RETURNS TO SCALE
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