Returns to scale

In the long run all factors of production are variable. It explains the behavior of the rate of increase in output production relative to the associated increase in the inputs the factors of production in the long run.

Returns to scale

On OX axis, labour and capital are given while on OY axis, output. In principle, consider a general function: Yet, barring this, two identical North Seas or two identical cities of Paris should not interfere with each other.

Wicksell, ; F. The definition of the concept of returns in to scale in a technological sense was further discussed and clarified by Knut Wicksel l,P. We can see the non- relationship between returns to scale and marginal productivity more clearly if we take a specific functional form for the production function.

Such an increase is called returns to scale. The ability to divide tasks, of course, is not available to the single man and single machine. Cobb-Douglas linear homogenous production function is a good example of this kind. Now, if we interpret this function to be a production function, then the implications are obvious.

Returns to scale

But this implies there are indivisibilities in production. Depending on whether the proportionate change in output equals, exceeds, or falls short of the proportionate change in both the inputs, a production function is classified as showing constant, increasing or decreasing returns to scale.

Such an increase is called returns to scale.

Talk:Returns to scale

They are different terms and not to be used interchangeably. The pari-passu law is simply the constant returns to scale case. Thus, doubling inputs steel in pipeline more than doubles output flow of oil. In other words, one needs to replicate the North Sea and Paris completely, is entirely possible.

Marshall used the concept of returns to scale to capture the idea that firms may alternatively face "economies of scale" i.Returns to scale: Returns to scale, in economics, the quantitative change in output of a firm or industry resulting from a proportionate increase in all inputs.

If the quantity of output rises by a greater proportion—e.g., if output increases by times in response to a doubling of all inputs—the production.

Law of Returns to Scale : Definition, Explanation and Its Types

Jul 15,  · The law of returns to scale examines the relationship between output and the scale of inputs in the long-run, when all the inputs are increased in Reviews: 1. The nature of the returns to scale affects the shape of a business’s average cost curve – when there are sizeable increasing returns to scale, and then we expect to see economies of scale from long run expansion.

ADVERTISEMENTS: 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 [ ].

Law of Returns to Scale

In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm).

Decreasing returns to scale implies that a + b 1. Now, the marginal products of capital and labor are: Now, the marginal products of capital and labor are.

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Returns to scale
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