Question

Distinguish between return to scale and return to variable factor

Answer 1

Returns to a factor:

1. Only one factor varies while all the rest are fixed.

2. The factor-proportion varies as more and more of the units of the variable factor are employed to increase output.

4. Returns to a factor or to variable propoADVEin negative returns.

3. It is a short-run phenomenon.

5. Returns to variable proportions are caused by indivisibility of certain fixed factors, specialisation of certain variable factors, or sub-optimal factor proportions.

Returns to scale:

1. All or at least two factors vary.

2. Factor proportion called scale does not vary. Factors are increased in same proportion to increase output.

3. It is a long-run phenomenon.

4. Returns to scale end up in decreasing returns.

5. Returns to scale can be attributed to economies and diseconomies of scale caused by technical and/or managerial indivisibilities, exhaustibility of natural and managerial resources, or depreciability of certain factors.