Explain the concept of returns to scale.
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Answer:
Returns to scale, in economics, the quantitative change in output of a firm or industry resulting from a proportionate increase in all inputs. If the quantity of output rises by a greater proportion—e.g., if output increases by 2.5 times in response to a doubling of all inputs—the production process is said to exhibit increasing returns to scale. Such economies of scale may occur because greater efficiency is obtained as the firm moves from small- to large-scale operations. Decreasing returns to scale occur if the production process becomes less efficient as production is expanded, as when a firm becomes too large to be managed effectively as a single unit.
The law of variable proportions emerges because factor proportions change as long as 1 factor is held unchanged and the other is raised. What if both factors can change (differ)? Always remember that this can occur only in the long run. 1 special case, in the long run, happens when both the factors are raised by the same amount of factors are ascended up.
When a proportionate increase in all inputs results in the rise in output by the same proportion, the production function is said to exhibit Constant returns to scale (CRS).
When a proportionate increase in all inputs results in the rise in output by the larger proportion, the production function is said to exhibit an Increasing Returns to Scale (IRS).
Decreasing Returns to Scale (DRS) occurs when a proportionate increase in all inputs results in the rise in output by a smaller proportion.
For instance, presume in a manufacturing procedure, all inputs get doubled. As an outcome, if the output gets doubled, the manufacturing procedure displays CRS. If the output is less than doubled, then DRS occurs and if it is more than doubled, then IRS occurs.