2. Laws of Returns to Scale
In long run, all factors are variable. The law of returns
to scale examines the relationship between output and
the scale of inputs in the long run when all the inputs
are increased in the same proportion.
3. Three phases of returns to scale
Unit Scale of Production Total Returns Marginal Returns
1 1 Labor + 2 Acres of Land 4 4 (Stage I - Increasing Returns)
2 2 Labor + 4 Acres of Land 10 6
3 3 Labor + 6 Acres of Land 18 8
4 4 Labor + 8 Acres of Land 28 10 (Stage II - Constant Returns)
5 5 Labor + 10 Acres of Land 38 10
6 6 Labor + 12 Acres of Land 48 10
7 7 Labor + 14 Acres of Land 56 8 (Stage III - Decreasing Returns)
8 8 Labor + 16 Acres of Land 62 6
4. Economies of Scale
Economies of scale refer to the cost advantage brought
about by an increase in the output of a product
5. Example of Economies of Scale
A family wants to print wedding
invitation cards for their daughter’s
wedding. Printing 500 cards costs
$1,000. However, printing 1,000
invitation cards will cost them $1,500.
Therefore, while printing 500 cards will
cost them $2 per invitation card,
printing 1,000 copies will cost $1.5 per
card. This is because the price will fall
after the initial set-up costs of the
printer have been covered. As a result,
this leaves only a marginal extra
printing cost for every additional card.
6. Diseconomies of Scale
Diseconomies of scale occur when
the cost per unit increases with an
increase in the quantity produced.
This means that any attempt by a
firm to increase its output will
transcend to a corresponding
increase in the unit cost associated
with the unit increase in output.
This usually happens when a firm
becomes too big. It is represented
on the following graph when going
from Q1 to Q2. Beyond point Q1,
which is the ideal firm size,
producing more goods increases
per-unit costs.
