The Laws Of Returns To Scale The laws of returns to scale explain the behavior of output in response to a proportional and simultaneous change in inputs. Increasing inputs proportionately and simultaneously is, in fact, an expansion of the scale of production.
When a firm increases both the inputs proportionately, there are three possibilities1. Total output may increase more than proportionately2. Total output may increase proportionately3. Total output may increase less than proportionatelyAccordingly, there are three kinds of return to scale1. Increasing returns to scale2. Constant returns To Scale3. Decreasing returns to scale
Increasing Returns to Scale The law of increasing returns to scale implies that output increases more than proportionately to the increase in input and the rate of increase in output goes on increasing with each subsequent increase in input.
The Causes of Increasing Returns ToScale1. Technical and managerial indivisibilities2. Higher degree of specialization3. Dimensional relations
Constant returns to scale When the change in output is proportional to the change in inputs, it exhibits constant returns to scale.
Constant returns to scale The constant returns to scale are attributed to the limits of the economies of scale. With expansion in the scale of production, economies arise from such factors as indivisibility of fixed factors, greater possibility of specialization of capital and labor, use of labor saving techniques of production, etc.
Constant returns to scale
Decreasing returns to scale The firms are faced with decreasing returns to scale when a certain proportionate change in inputs, k & l, lead to less than proportionate change in output.
Decreasing returns to scale
Causes of Diminishing return to scale The decreasing returns to scale are attributed to the diseconomies of scale. The most important factor causing this is ‘the diminishing return to management’. Another factor is the exhaustibility of natural resources.