law of Returns to Scale

Explain the law of Returns to Scale. Explain the reasons for returning to scale.

Ans:- Meaning of law of return to scale- Return to scale describes the changes in production due to the all input units are varied by the same proportion.

Definition of return to scale:- “The Return to scale refers to changes in total output as a result of changes in total input factor by the same proportion. Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased in the manufacturing, then output increases at a higher rate. It means if all inputs are doubled, The, output will also increase at a faster rate than double. Hence, it is said to be increasing returns to scale.

In other words:- Law of return to scale refers to increase in output as a result of increase in all factors of production in the same proportion. Such an increase in output is known as Return to scale. It is a long run concept. law of Returns to Scale

Production function

P= f ( L, K )

L= Labour K= capital

If both the factors of production i.e labour ( L) and capital (K) are increased in the same proportion (m) then production function will be written as:

P= f ( ml, mk )

There are three aspect of Return to scale

1. Increasing Return to Scale
2. Constant Return to Scale
3. Diminishing Return to Scale

1.Increasing Return to Scale:- When all factors of inputs are increased causes greater increase in output than input increase. Understand with the following figure.

Then increasing returns to scale occurred. The above Figure Shows that a 10% increase in all factor inputs causes a 15% increase in output. Again 15% increase in all factor increase causes 25% increase in output. Thus, any percentage increase in all input factors is causing a greater percentage increase in output. By gndupapers.online law of Returns to Scale

• Causes of Increasing Return to Scale

There are two types of Causes

• Internal causes
• External Causes

Internal Causes

• Internal Causes

1. Real Economies:- It deals with the reduction in the physical quantity of inputs due to labour skills, labour specialisation and labour division. law of Returns to Scale
2. Inventory Economies:- A big enterprise enjoys inventory economies. Because they purchase a large stock as a result of which they get a discount. When the raw material is scarce in the market and then they sell at the highest price. The firm has no need to worry at all. So they get an increasing return.
3. Managerial Economies:- A firm produces efficient and talented managers by using advanced machines. Thus all production will be increased due to decentralised work of the firm. law of Returns to Scale
4. Transport and Storage Economies:- A big firm has its own trucks which carry its raw material and finished production carrying to the market. Transport and storage help it to sell its products at favourable prices. law of Returns to Scale

External Economies.

1. Real Economies:- These firms are shared in by a number of firms and industry. These external economies include managerial techniques, Developed financial areas and roads. And some projects are shares and jointly operated by their experts employees.
2. Economies of information:- Developed system of communication of a country will be helpful in increasing return in production.  law of Returns to Scale

2. Constant Return to Scale

Constant Return to Scale occurs when a percentage increase in all factors of input increase causes the same increase in output.

Above figure shows that a 10% increase in all factors of inputs causes a 10% increase in output. Again 20% increase in inputs causes 20% increase in output. Therefore, any percentage increase in inputs matched with an equal percentage increase in output is called constant return.

Causes of Constant Return to scale

( I ) Economies of scale give rise to increasing return to scale.

( II ) Diseconomies of scale lead to Decreasing Return to Scale.

( III ) This constant Return to Scale exists after the phase of increasing return to scale exhausts itself and before the phase of Decreasing return to scale sets in. Means when all skills and advancement of machines are exhausted. Due to which products return remains constant.

( IV ) Constant Return to Scale arises when economies are exactly balanced by Diseconomies. law of Returns to Scale

3. Diminishing Return to Scale:- Diminishing Return to Scale occurs when a percentage increase in all factors of inputs causes a lesser increase in output. As 15% increase in all factors of inputs causes only 10% increase in output.

Above figure shows that 15% increase in all factor inputs causes only 10% increase in output. Again 25% increase in factor inputs causes 16.50% increase in output. Thus, Return to scale is thus diminishing.

• Causes of Diminishing Return to Scale

1. External Diseconomies
2. External Diseconomies

( 1 ) Unwieldy Management :- At the biggest firm management is difficult to carry out its managed functions. It becomes difficult to supervise the work spread all over the firm. Due to which proper control is not possible in the business and as a result of which return is decreased. law of Returns to Scale

( 2 ) Technical Difficulties:- At certain points technical improvement can be carried out. But after that it becomes difficult to improve on it. Which becomes in economies causes Diseconomies of scale. And returns also declined in the firm.

B. External Diseconomies

( I ) These Diseconomies are suffered by all firms. When the area of a firm expands beyond the limit then firms operating in that industry suffer external Diseconomies. Example:- Firms experience great difficulties in procuring raw material. Because of the large demand for raw materials, it has become scarce and expensive.

Cost of land for the new firms becomes prohibitive.

A Brief Of Law of Returns To Scale

Conclusion :- Now we can understand the scale of Return in the production. Which passes through three stages. As increasing, diminishing and constant phases of return. We can also understand its causes due to which they occurred in the business.

You can enjoy love poetry on the way to study. law of Returns to Scale

Essential question of business economics which you must learn.

1. What is the definition of national income? Explain the different methods for the measuring of National income or gross product.
2. What are the different problems in measurement of national income in underdeveloped countries like India? Explain.
3. How is the price and output of a firm and industry determined under perfect competition?
4. Elaborate upon the meaning and features of monopolistic competition. How is the output and price determination under monopolistic competition?
5. Explain in detail the Law of Variable Proportions. Give its causes