Law of Returns to Scale
Definition of Law of Returns to Scale
According to the law of returns to scale, output changes in proportion to input changes. The law of returns to scale states that when there is a proportionate change in input, the output also changes. Every factor of production is variable over the long term. There is no fixed factor. Thus, changing the quantity of all factors of production can change the scale of production. The distinction between fixed factors and variable factors vanishes in the long run. This means that in the long-run everything is variable.
As inputs are increased in the same proportion, the law of returns to scale describes the relationship between output and input scale in the long run. As a result of the law of returns to scale, when the amount of inputs changes proportionately, the output also changes. Changes in inputs influence output in different ways. As an example, output changes by a large, same, or small proportion based on changes in input.