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The Laws Of Returns To ScaleThe laws of returns to scale explain the
behavior of output in response to a proportional and simultaneous change in inputs. Increasing inputs proportionately and simultaneously is, in fact, an expansion of the scale of production.
When a firm increases both the inputs proportionately, there are three possibilities
1. Total output may increase more than proportionately
2. Total output may increase proportionately3. Total output may increase less than
proportionately
Accordingly, there are three kinds of return to scale1. Increasing returns to scale2. Constant returns To Scale3. Decreasing returns to scale
Increasing Returns to Scale
The Causes of Increasing Returns To Scale1. Technical and managerial indivisibilities2. Higher degree of specialization3. Dimensional relations
Constant returns to scaleWhen the change in output is proportional to
the change in inputs, it exhibits constant returns to scale.
Constant returns to scale
Constant returns to scaleThe constant returns to scale are attributed
to the limits of the economies of scale. With expansion in the scale of production, economies arise from such factors as indivisibility of fixed factors, greater possibility of specialization of capital and labor, use of labor saving techniques of production, etc.
Decreasing returns to scale
Decreasing returns to scaleThe firms are faced with decreasing returns
to scale when a certain proportionate change in inputs, k & l, lead to less than proportionate change in output.
Causes of Diminishing return to scaleThe decreasing returns to scale are
attributed to the diseconomies of scale. The most important factor causing this is ‘the diminishing return to management’. Another factor is the exhaustibility of natural resources.