Hence, the increasing complexity in management, coordination, and control eventually leads to decreasing returns. When the firm expands to a very large size, it becomes difficult to manage it with the same efficiency as before. Generally, this happens when a firm expands all its inputs, especially a large firm. Decreasing Returns to ScaleĪn incidence of decreasing returns to scale would mean that the increase in output is less than the proportionate increase in the input. Further, specialization of land and machinery can be another reason. Evidently, if all the factors are perfectly divisible then there might be no increasing returns. Some factors are available in large units, such that they are completely suitable for large-scale production. The indivisibility of factors is another reason for this. Note that upon expansion, a firm experiences increasing returns to scale. Here, the proportionate increase in production is greater than the increase in inputs. Lastly, it is also known as the linear homogeneous production function. Interestingly, the production function of an economy as a whole exhibits close characteristics of constant returns to scale.Īlso, studies suggest that an individual firm passes through a long phase of constant return to scale in its lifetime. Browse more Topics under Theory Of Production And Costįor constant returns to scale to occur, the relative change in production should be equal to the proportionate change in the factors.įor example, if all the factors are proportionately doubled, then constant returns would imply that the production output would also double. Of course, the return to scale can be of three types- increasing, decreasing and constant. Thus, in the long run, we proportionately vary the inputs and observe the relative change in production. This is also known as changes in scale, hence the name return to scale. All the factors are increased or decreased together. Thus, in the long run, we aim to study the effect of the changes in all the inputs on the production output. Recollect that we take the help of the law of diminishing returns to study production in the short run, whereas in the long run, the returns to scale are at the helm.Īgain, the long run is a long enough period in which we can alter both fixed and variable factors. It is important to realize that the study of production completely differs according to the time frame. 3 Solved Example Cobb Douglas Production Function Returns To Scale
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