Page 115 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes
Figure 8.3: CRS Production Function

If all the factors of production are increased in a particular proportion and the output increases
by more than that proportion then the production function is said to exhibits IRS. For example,
in many industrial processes if all inputs are doubled, factories can be run in more effi cient
and effective ways, there by actually more than doubling output. This is shown in Figure 8.4.
To produce X units of output, L units of Labour and K units of output are needed. If labour is
doubled to 2L units and capital to 2K units, an output greater than 2X is produced (point c lies on
a higher isoquant than point b).
If the factors of production are increased in a particular proportion and the output increases
by less than that proportion than the production function is said to exhibit DRS. For example,
if capital and labour are increased by 10% and output rises by less than 10% the production
function is said to exhibit decreasing returns to scale.
Figure 8.4: IRS Production Function

If you look at Figure 8.5, to produce X units of output L units of labour and K units of capital
are required. By doubling the input, the output increases by less than twice its original level.
For example, if inputs are 2L and 2K, output level ‘a’ is reached, which lies below the one
showing 2X.

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