Question

Explain the theory of returns to scale.

Answer 1

♥♥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.