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
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Law of Returns to Scale
THANK YOU
Dr. K. Anbumani
Associate Professor