Law of Returns to scale in Economics – Microeconomics | Management Notes

Law of Returns to scale in Economics
Microeconomics
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Management Notes

Law of returns scale explains the Long-run input output relationship ie;long run production function in which all the factors of production are variable. It explains how output changes when all factors of production are changed in the same proportion.For e.g, If both the inputs are doubled ,the output may be more than double ,equal to double or less than double.

Possiblities of law of returns to scale:

  • Increasing Returns to scale(IRS)
  • Decreasing Returns to scale(DRS)
  • Constant Returns to scale(CRS)

Increasing Returns to Scale(IRS):

Increasing returns to scale means output increases in greater proportion than the increase in inputs.
For e.g. if all inputs are increased by 25% and output increases by 30% then increasing returns to scale will be prevailing .Increasing returns to scale can be shown through different iso-quants.

When increasing returns to scale occur ,the successive isoquants will lie at decreasingly smaller distance because of the economics of the scale ie; internal economics and external economics.

Decreasing Returns to Scale(DRS):

Deccreasing returns to scale means output increases in less proportion than the increase in inputs.

For e.g. if all inputs are increased by 25% and output increases by 20% then decreasing returns to scale will be prevailing .
When decreasing returns to scale occur ,the consecutive isoquants will lie at increasingly wider distance because of the diseconomics of the scale ie; internal diseconomics and external diseconomics.

Constant Returns to Scale(CRS):

Constant returns to scale means output is proportional to the change in inputs ie; proportionate of output and input are equal.
For e.g. if all inputs are increased by 25% and output increases by 25% then decreasing returns to scale will be prevailing .

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When constant returns to scale occur ,the successive isoquants will lie at equ-distance from each other because of the neither economics of the scale nor diseconomics of the scale.When decreasing returns to scale occur ,the consecutive isoquants will lie at increasingly wider distance because of the diseconomics of the scale ie; internal diseconomics and external diseconomics.

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