RETURN TO SCALE TYPE (COMPLETE ASSIGNMENT)

RETURN TO SCALE TYPES:
INCREASING,CONSTANT & DECREASING

DEFINITION:
“The term returns to scale refers to the changes in output as all
factors change by the same proportion.” or “Returns to scale
relates to the behaviour of total output as all inputs are varied
and is a long run concept”.


RETURN TO SCALE ARE OF THE FOLLOWING
THREE TYPES:
1. Increasing Returns to scale.
2. Constant Returns to Scale.
3. Diminishing Decreasing Returns to Scale.


EXPLANATION:
In the long run, output can be increased by increasing all
factors in the same proportion. Generally, laws of returns to
scale refer to an increase in output due to increase in all
factors in the same proportion. Such an increase is called
returns to scale.
Suppose, initially production function is as follows:
P = f (L, K)

, Now, if both the factors of production i.e., labour and capital
are increased in same proportion i.e., x, product function will
be rewritten as.




The above stated table explains the following three stages
of returns to scale:




1)INCREASING RETURNS TO SCALE:
Increasing returns to scale or diminishing cost refers to a
situation when all factors of production are increased, output
increases at a higher rate. It means if all inputs are doubled,
output will also increase at the faster rate than double. Hence,
it is said to be increasing returns to scale. This increase is due