Returns to scale

Returns to scale:

Returns to scale represents different levels of production at different factors of production.

Here if both factors x and y are increased then at the preliminary stage production increases at an increasing rate. As the factors are increased further then production increases at constant rate. As the factors increased further then production increases at constant rate.
Again if the factors of production are increased further, production increases but at a decreasing rate.

Increasing returns to scale:

Increasing returns to scale means that output increases in a greater proportion than the increase in inputs. Thus if all factors are doubled and output increases by more than a double, then the returns to scale are increasing. When a firm expands, the increasing returns to scale are obtained in the beginning.

Fig.: increasing returns to scale

In figure ox axis represent the labour and oy axis represents the capital. Increasing returns to scale can be shown through ISO-QUANTS. When increasing returns to scale occur, the successive ISO-QUANTS will tie at progressively decreasingly smaller distances along straight live or through the origin. In the above diagram the various ISO-QUANTS IQ, IQ2 and IQ3 are drawn which successively represent 100, 200 and 300 units of output. It will be seen that distances between the successive ISO-QUANTS decrease as we expand output by increasing the scale. Thus increasing returns to scale occur since AB <>

Constant returns to scale:

If all factors are increased in a given proportion and the output increases in the same proportion returns to scale are said to be constant. Thus, if a doubling or trebling of all factors causes a doubling or trebling of outputs, returns to scale are constant.

In the above figure ox axis represents the labour and oy axis represents the capital.

Constant returns to scale can be shown through ISO-QUANTS. In the above diagram the various ISO-QUANTS IQ1, IQ2 and IQ3 are drawn which successively represent 100, 200 and 300 units of output. It will be seen from the figure that successive ISO-QUANTS are equidistant from each other along the straight live OR from the origin. Thus along the live OR, AB=BC.
The distance between the successive equal product curves being the same along the straight line through the origin means that if both labour and capital are increased in a given proportion, output expands by the same proportion.

Decreasing returns to scale:

When output increases in a smaller proportion than the increase in all inputs, decreasing returns to scar are said to prevail. When a firm goes on expanding by increasing all his inputs, eventually diminishing returns to scale will occur.

In the above figure ox axis represent the labour and oy axis represents the capital. The case of decreasing returns to scale can be shown on an ISO-QUANT map. When successive equal product curves such as IQ1, IQ2, and IQ3 lie at progressively larger and larger distance on a straight line or passing through the origin, returns to scale will be decreasing.

In the figure decreasing returns to scale occur since BA> OA, BC>AB. It means that more of inputs are required to obtain equal increments in output.