Laws of Return to Scale

Supriyo Sir
Laws of return to scale

What do you mean by Laws of Return to Scale?

In the long run, the change in production by changing every factor of production is called the Laws of Return to Scale. Again, the amount of employment of the factor of production is called the Scale of Production.

When the firm increases the amount of all factors employed, its production volume increases. Suppose the production function of the firm is Q = f (K, L). Now if the firm doubles or triples the employment of both K and L, the level of production will also double or triple. That is, the amount of total production must increase with the increase in the level of production. So, Return to Scale refers to the changes in output as all factors change by the same proportion. This return to scale is a long-term phenomenon.

In the long-term production, there are three types of Returns to scale. Namely- (a) Increasing Return to scale, (b) Constant Return to scale, (c) Decreasing Return to scale.

(a) Increasing Return to scale:

In the long run, if the rate of production is higher than the rate at which all the factors are employed to increase the production of the firm, is called Increasing Return to scale. Suppose the input is increased at a rate of 10%, but the amount of output is increased at a rate of more than 10%, then it can be said that the increasing return to scale is effective.

(b) Constant Return to scale:

When the amount of production increases at the same rate at which the amount of factors of production is increased, is called Constant Return to Scale. Suppose the input is increased at the rate of 10% but the output is increased at the rate of 10%, then it can be said that the constant return to scale is effective.

(c) Decreasing Return to scale:

When the amount of production increases at a lower rate than the proportion in which the amount factors of production are employed, then that is called Decreasing Return to scale. Suppose, if the factors of production are increased at the rate of 10% but the amount of production increased is less than 10%, then it can be said that the decreasing return to scale is effective.

Liked our post?

We are available with lots and lots of commerce related contents.

Follow us on Facebook and Youtube  

Related posts