Scribd
Upload
99 views21 pages

Law of Returns to Scale Guide

1) The law of returns to scale explains how output changes proportionally with proportional changes in inputs. It refers to long-run production relationships. 2) There are three types of returns to scale: increasing, decreasing, and constant. Increasing returns occur when output increases more than proportionally to inputs. Decreasing returns occur when output increases less than proportionally, and constant returns occur when output increases proportionally. 3) The causes and characteristics of each type were discussed, including economies of scale with increasing returns and diseconomies with decreasing returns. Constant returns occur when productivity remains proportional to input increases.

Uploaded by

Yash Goyal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
99 views21 pages

Law of Returns to Scale Guide

1) The law of returns to scale explains how output changes proportionally with proportional changes in inputs. It refers to long-run production relationships. 2) There are three types of returns to scale: increasing, decreasing, and constant. Increasing returns occur when output increases more than proportionally to inputs. Decreasing returns occur when output increases less than proportionally, and constant returns occur when output increases proportionally. 3) The causes and characteristics of each type were discussed, including economies of scale with increasing returns and diseconomies with decreasing returns. Constant returns occur when productivity remains proportional to input increases.

Uploaded by

Yash Goyal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 21

LAW OF RETURN TO SCALE

By

Nitin Roll no. 230101010043


Ashima Roll no. 230101010044
Index
• Introduction
• Meaning & Definition
• Advantage of Return to Scale
• Assumptions
• Cost effect on small and large enterprise
• Type and cause of Return to scale
a. Increasing Return to scale
b. Decreasing Return to scale
C. Constant return to scale
• Conclusion
Introduction
Managerial economics involves the use
of economic theories and principles to
make decisions regarding the allocation
of limited resources. In the long run all
factors of production are variable. No
factor is fixed. Law of returns to scale is
one of the most important metrics to
consider while running a factory.
Meaning & Definition
The law of returns to scale explains the
proportional change in output with respect to proportional
change in inputs.
According to Watson, “Returns to
Scale is related to the behaviour of total output as all
inputs are varied in same proportion and it is a long run
concept.”
• Reduce per unit cost

• Increased profit

• Growth of Business

• Business Creditability Increases

• Improvement Existing Process


Assumptions
Assumption of Returns to Scale

• The firm is using only two factors of production that are capital and labour.

• Labour and capital are combined in one fixed proportion.

• Prices of factors do not change

• State of technology is fixed.


Cost effect on small and large enterprise
1. Increasing Return to scale
If the proportional change in the
output of an organization is greater
than the proportional change in
inputs
For example, to produce a
particular product, if the
quantity of inputs is doubled
and the increase in output is
more than double, it is said to
be an increasing returns to
scale.
As shown in Figure, a movement from
A to B shows that the amount of input
is doubled. When labour and capital
are doubled from 2 to 4 units, output
increases more than double, that is,
from 50 units to 120 units. This is
increasing returns to scale, which
occurs because of economies of scale.
Cause of Increasing return to scale occurs?
• Return to scale increasing due to Large scale of
production

• Division of labour with specialization

• Effective communication between factors

• Complete utilisation of the fixed factor


2. Diminishing Returns to Scale
Diminishing returns to scale refers to a
situation when the proportionate
change in output is less than the
proportionate change in input.
For example, when capital and labour
is doubled but the output generated is
less than doubled, the returns to scale
would be termed as diminishing
returns to scale.
As shown in Figure, a movement from A
to B shows that the amount of input is
doubled. When labour and capital are
doubled from 2 to 4 units, output
increases less than double that is from C
50 units to 80 units. This is diminishing
returns to scale. B
A
Cause of Diminishing Return to scale occurs ?
1. Lower levels of productivity.

2. Limited demand.

3. Negative impact on the working


environment.

4. Low working efficiency


3. Constant low of Return to scale
when the proportionate change in
input is equal to the proportionate
change in output is called the
Constant Return to scale.
For example, when inputs are
doubled, so output should also be
doubled, then it is a case of
constant returns to scale.
As shown in Figure, a movement from A
to B shows that the amount of input is
doubled. When labour and capital are
doubled from 2 to 4 units, output also C
increases double from 50 units to 100
units. This is Constant returns to scale. B

A
Cause of occurring constant Return to scale ?
Constant returns to scale occur when the long-
run average between a company’s inputs and
outputs are proportional to each other. In other
words, as the cost of total production increases,
the value of their goods goes up by the same
percentage of increase.
Return to scale is a metric that
evaluates the change in
productivity after increasing all
production inputs over time.

You might also like