other name for return to scale answer
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Answer:
Law of Returns to Scale : Definition, Explanation and Its Types!
In the long run all factors of production are variable. No factor is fixed. Accordingly, the scale of production can be changed by changing the quantity of all factors of production.
Definition:
“The term returns to scale refers to the changes in output as all factors change by the same proportion.” Koutsoyiannis
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“Returns to scale relates to the behaviour of total output as all inputs are varied and is a long run concept”. Leibhafsky
Returns to scale are of the following three types:
1. Increasing Returns to scale.
2. Constant Returns to Scale
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3. Diminishing Returns to Scale
Explanation:
In the long run, output can be increased by increasing all factors in the same proportion. Generally, laws of returns to scale refer to an increase in output due to increase in all factors in the same proportion. Such an increase is called returns to scale.
Suppose, initially production function is as follows:
P = f (L, K)
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Now, if both the factors of production i.e., labour and capital are increased in same proportion i.e., x, product function will be rewritten as.
Table Showing Different Stages of Return to Scale
The above stated table explains the following three stages of returns to scale:
1. Increasing Returns to Scale:
Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased, output increases at a higher rate. It means if all inputs are doubled, output will also increase at the faster rate than double. Hence, it is said to be increasing returns to scale. This increase is due to many reasons like division external economies of scale. Increasing returns to scale can be illustrated with the help of a diagram 8.
Increasing Returns to Scale
Explanation: