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The Law Of Returns To Scale


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The Law Of Returns To Scale

  1. 1. The Law Of Returns To Scale
  2. 2. The Laws Of Returns To Scale <ul><li>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. </li></ul>
  3. 3. <ul><li>When a firm increases both the inputs proportionately, there are three possibilities </li></ul><ul><li>Total output may increase more than proportionately </li></ul><ul><li>Total output may increase proportionately </li></ul><ul><li>Total output may increase less than proportionately </li></ul><ul><li>Accordingly, there are three kinds of return to scale </li></ul><ul><li>Increasing returns to scale </li></ul><ul><li>Constant returns To Scale </li></ul><ul><li>Decreasing returns to scale </li></ul>
  4. 4. Increasing Returns to Scale
  5. 5. The Causes of Increasing Returns To Scale <ul><li>Technical and managerial indivisibilities </li></ul><ul><li>Higher degree of specialization </li></ul><ul><li>Dimensional relations </li></ul>
  6. 6. Constant returns to scale <ul><li>When the change in output is proportional to the change in inputs, it exhibits constant returns to scale. </li></ul>
  7. 7. Constant returns to scale
  8. 8. Constant returns to scale <ul><li>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. </li></ul>
  9. 9. Decreasing returns to scale
  10. 10. Decreasing returns to scale <ul><li>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. </li></ul>
  11. 11. Causes of Diminishing return to scale <ul><li>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. </li></ul>