Scribd
Upload
519 views12 pages

Law of Returns To Scale

The document discusses the law of returns to scale and how it differs from the law of diminishing returns. The law of returns to scale operates in the long run and explains how output changes proportionately with changes to all inputs. Output can increase proportionately (constant returns to scale), more than proportionately (increasing returns to scale), or less than proportionately (diminishing returns to scale). Increasing returns leads to lower costs per unit, constant returns keeps costs the same, and diminishing returns increases costs per unit as production scales up.

Uploaded by

hitesh sharma
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
519 views12 pages

Law of Returns To Scale

The document discusses the law of returns to scale and how it differs from the law of diminishing returns. The law of returns to scale operates in the long run and explains how output changes proportionately with changes to all inputs. Output can increase proportionately (constant returns to scale), more than proportionately (increasing returns to scale), or less than proportionately (diminishing returns to scale). Increasing returns leads to lower costs per unit, constant returns keeps costs the same, and diminishing returns increases costs per unit as production scales up.

Uploaded by

hitesh sharma
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/ 12

Laws of Production

Law of Returns to Scale

Dr. K. Anbumani
Associate Professor
Law of Returns to Scale
The law of diminishing returns is often confused with the law
of returns to scale. 

The law of diminishing returns operates in the short run and


it explains the production behavior of the firm with change in
any one factor variable while other factors are kept constant.

Whereas the law of returns to scale operates in the long run


and it explains the production behavior of the firm with
change in all variable factors.
Law of Returns to Scale
There is no fixed factor of production in the long run.

The law of returns to scale analysis the effects of scale on


the level of output.

We find out in what proportions the output changes when


there is proportionate change in the quantities of all inputs.

The answer to this question helps a firm to determine its


scale or size in the long run.
Law of Returns to Scale
The output may increase;

by a great proportion,
by in the same proportion or
by a smaller proportion to its inputs.

This behavior of output with the increase in scale of


operation is termed as;

increasing returns to scale,


constant returns to scale and
diminishing returns to scale
Increasing Returns to Scale
If the output of a firm increases more than in proportion to
an equal percentage increase in all inputs, the production is
said to exhibit increasing returns to scale.

Example: if the amount of inputs are doubled and the output


increases by more than double, it is said to be an increasing
returns to scale.

When there is an increase in the scale of production, it leads


to lower average cost per unit produced as the firm enjoys
economies of scale.
Increasing Returns to Scale
Constant Returns to Scale
When all inputs are increased by a certain percentage, the
output increases by the same percentage, the production
function is said to exhibit constant returns to scale.
 
Example: if a firm doubles inputs, it doubles output. In case,
it triples output.

The constant scale of production has no effect on average


cost per unit produced. Economies of scale reaches
saturation.
Constant Returns to Scale
Diminishing Returns to Scale
The term 'diminishing' returns to scale refers to scale where
output increases in a smaller proportion than the increase in
all inputs.

Example: if a firm increases inputs by 100% but the output


decreases by less than 100%, the firm is said to exhibit
decreasing returns to scale.

The firm's scale of production leads to higher average cost


per unit produced. Firm faces diseconomies of scale.
Diminishing Returns to Scale

Diminishin
g
Law of Returns to Scale
THANK YOU

Dr. K. Anbumani
Associate Professor

You might also like