1. Returns To Scale
Submitted to
Professor.
Dr. Manminder S. Saluja
International Institute of Professional
Studies,
( Devi Ahilya University Indore )
Created by
Naveen Chouhan
ES-2K21-18
MBA E-SHIP 1ST SEM
2021-22
2. INDEX
01. Introduction 02. Definition
03. Explanation
06 Stage of return to scale
05 Assumptions
2
08 CONCLUSION
04.Law of Returns to Scale
07 Example
3. Introduction
Returns to scale refers to the proportion
between the increase in total input and
the resulting increase in output
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.
3
4. Definition
“The term returns to scale refers to the changes in output as all factors
change by the same proportion.” Koutsoyiannis
“Returns to scale relates to the behaviour of total output as all inputs
are varied and is a long run concept” Leibhafsky
4
5. 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)
5
6. Law of Returns to
Scale
The laws of returns to scale refer to an increase in output due to an increase
in all factors in the same proportion. Such an increase is called returns to
scale.
P = f (L, K)
Return to scale referred to change in output when all the factor input.
Change Simulataneously in the same proportion in the long run
When a firm change the quantity of all input in long run it change its scale of
production.
It is a long run concept.
6
7. Assumptions
All the factors of production (such as land, labor and capital) but
organization are variable
The law assumes constant technological state. It means that
there is no change in technology during the time considered.
The market is perfectly competitive.
Outputs or returns are measured in physical terms.
7
8. Returns to scale are of the
following three types:
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1. Increasing Returns to scale.
2. Constant Returns to Scale
ADVERTISEMENTS:
3. Diminishing Returns to Scale
1 Increasing Returns to scale.
2. Constant Returns to Scale
3. Diminishing Returns to Scale
9. 9
Stages of Returns to
Scale
1 Increasing Return to
scale.
when proportionate increase in total output is more than proportionate.
Increasing input its increasing returns to scale.
If all input are increased by 100% then output increase by more than
100%.
Input. (units)
(K=capital ; L=
labour)
Output
(units.)
Percentage
Increas in input.
Percentage
increase in
output.
1K + 2L 100 - -
2K + 4L 250 100% 150%
4K + 8L 600 100% 140%
11. 11
Factors for Increasing return to
scale.
Increasing return to scale occurs due to in economic of large scale
Economic of scale refers to benefit due to large scale of
production.
Economics
scale.
Internal
economics.
External
economics.
Benefits of large scale
production which are
available to. A firm
within its own
operation.
Benefits of large scale
products which are
shared in by all the
firm in an industry.
12. 12
Stages of Returns to
Scale
2 Constant. Return to
scale.
when proportionate increase in total output is equal to proportionate.
Increas in input , it is constant returns to scale.
If all input are increased by 100% then the output also increased by.
100%.
Input. (units)
(K=capital ; L=
labour)
Output
(units.)
Percentage
Increas in input.
Percentage
increase in
output.
4K + 8L 600 - -
6K + 16L 1200 100% 100%
8K + 32L 2400 100% 100%
14. 14
Factors for Constant. Returns to
scale.
Concentrated to scale. Operate up that the firm has achieved the
point of optimum capacity. After this point, economics of production
are counterbalanced by the.
Diseconomies of production. Dis, economics of scale means that a
firm has grown so large that it is become very difficult to manage it.
15. 15
Stages of Returns to
Scale
3 diminishing return to
scale.
when proportionate increase in total output is less than proportionate.
Increase in input , it is diminishing. returns to scale.
If all input are increased by 100% then the output increased by. Less than
100%.
Input. (units)
(K=capital ; L=
labour)
Output
(units.)
Percentage
Increas in input.
Percentage
increase in
output.
8K + 32L 2400 - -
16K + 64L 4200 100% 75%
32K + 128L 7350 100% 75%
16. 16
3 Diminishing return to scale.
0
1000
2000
3000
4000
5000
6000
7000
8000
0
20
40
60
80
100
120
140
0 5 10 15 20 25 30 35
OUTPUT
capital
LABOUR
Diminishing return to scale.
OUTPUT Linear (OUTPUT)
17. 17
Factors for Diminishing return to
scale.
Diminishing returns to scale occur mainly due to diseconomies of
large scale.
Deseconomies
of scale.
Internal
Deseconomies
External
Deseconomies
Refer to the
disadvantage. of large
scale production,
which a firm has to
suffer due to its own
operation.
Refer to disadvantage
of large scale
production which are
suffered by all firm in
an industry.
18. 18
Internal diseconomies.
Diseconomies of scale of
production.
Inefficient management
Technical difficulties
Production diseconomies
marketing diseconomies.
Financial diseconomies
External diseconomies.
Diseconomies of pollution.
Diseconomies of strain on inrastructure.
Diseconomies of high factor price.
19. 19
Example for Return to
scale.
Output (units) %Increas in input.% increase in output.
1K 2L 100 - -
2K 4L 250 100% 150%
4K 8L 600 100% 140%
6K 16L 1200 100% 100%
8K 32L 2400 100% 100%
16K 64L 4200 100% 75%
32K 128L 7350 100% 75% }Diminishing return to scale
Stages of return to scale
Input. (units)
}Increasing return to scale
}Constant returns to scale
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
0
20
40
60
80
100
120
140
0 5 10 15 20 25 30 35 40
OUTPUT
LABOUR
CAPTAL
Return to scale
LABOUR OUTPUT Linear (OUTPUT)
K =
Capital
L =
Labour
20. Timeline
1 Definition
The term returns to scale refers to the
changes in output as all factors
change by the same proportion
3 Types of Returns to scale
1. Increasing Returns to scale.
2. Constant Returns to Scale
3. Diminishing Returns to Scale
2 Law of Returns to Scale
The laws of returns to scale refer to an increase in
output due to an increase in all factors in the same
proportion. Such an increase is called returns to scale.
4 Factors affecting
Return to scale
.
20
21. 21
Summary
The law of returns to scale explains the proportional change in output with
respect to proportional change in inputs.
In other words, the law of returns to scale states when there are a
proportionate change in the amounts of inputs, the behavior of output also
changes.
The degree of change in output varies with change in the amount of inputs.
For example, an output may change by a large proportion, same proportion,
or small proportion with respect to change in input.
