What is law of returns to scale?
Dear Student,
In the long run, when all the factors of production are increased at the same rate, the scale of production gets enlarged. The law operating in such a situation is called "the law of returns to scale ". This law refers to the increase in the level of output when all the factor inputs to the production are increased simultaneously in the same proportion.
The three tendencies of the law are as follows :
(i) Increasing returns to scale :
The proportion of increase in output is greater than the proportion of increase in all the factor inputs. This can be due to use of advanced machines and technology, availability of better services like transportation, communication, banks,etc..
Eg : When the input increases by 100%, the resultant output increases by 120%.
(ii) Constant returns to scale :
The proportion of increase in output is in the same proportion as that of the increase in all the factor inputs. This situation occurs when the firm has attained its optimum size and the economies of scale are counter-balanced by the diseconomies of scale.
Eg : When the input increases by 100%, the resultant output also increases by 100%.
(iii) Diminishing returns to scale :
The proportion of increase in output is lesser than the proportion of increase in all the factor inputs. This situation occurs when the firm's production is beyond the optimum capacity, high labour cost, scarcity of funds, etc..
Eg : When the input increases by 100%, the resultant output increases by 90%.
Regards,
In the long run, when all the factors of production are increased at the same rate, the scale of production gets enlarged. The law operating in such a situation is called "the law of returns to scale ". This law refers to the increase in the level of output when all the factor inputs to the production are increased simultaneously in the same proportion.
The three tendencies of the law are as follows :
(i) Increasing returns to scale :
The proportion of increase in output is greater than the proportion of increase in all the factor inputs. This can be due to use of advanced machines and technology, availability of better services like transportation, communication, banks,etc..
Eg : When the input increases by 100%, the resultant output increases by 120%.
(ii) Constant returns to scale :
The proportion of increase in output is in the same proportion as that of the increase in all the factor inputs. This situation occurs when the firm has attained its optimum size and the economies of scale are counter-balanced by the diseconomies of scale.
Eg : When the input increases by 100%, the resultant output also increases by 100%.
(iii) Diminishing returns to scale :
The proportion of increase in output is lesser than the proportion of increase in all the factor inputs. This situation occurs when the firm's production is beyond the optimum capacity, high labour cost, scarcity of funds, etc..
Eg : When the input increases by 100%, the resultant output increases by 90%.
Regards,