Page 172 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-8: Production Function and Law of Production

8.14 Returns to Scale Notes

The returns to scale describes those behaviours of production which come by changing all the inputs
in a similar way. This is a long term conception.
All the factors are variable in long run. No factors The Main Difference in the Instrument
are fixed so we can change the production scale by Returns and Returns to Scale
changing same rate of changes in all the factors.
Return means the case study of the behaviour of
According to Koutsoyiannis, “The term returns production. In this case, the scale of production is
to scale refers to the change in output as all constant. But that means that changes in the ratio.
factors change by the same proportion.” In contrast, returns to scale, the scale of production
A production of a product can increase by changes. The scale of production, but in this case turn
increasing all factors in similar ratio or different ratio of the means of production is constant.
ratios in long run. Generally, the law of return to
scale is the increased production rate by increasing
all factors in a similar ratio. This view in production is called Returns to Scale.
Suppose that primary production scale is—

P = f [L, K]

If both the factors of production like labour (L) and capital (K) are increased in similar proportion (m)
then the total production would be P . So,
1
P = f [mL, mK]
1
P
___
1

(1) If P increases like the ratios of all the factors increased means = m, then it would be called Constant

P
1
Returns to Scale.
P
___
1

(2) If P changes in decrease ratios of all the factors means < m then it would be called Diminishing
P
1
Returns to Scale.
P
___
1
(3) If P changes in increasing view like the ratios of all the factors increased means > m then it would
P
1
be call Increasing Returns to Scale.
This Returns ro Scale can be described by Table 5.
Table 5: Returns to Scale
Percentage
Units of Units of increase in Total Percentage Returns to
Labour Capital (2) Labour and Production (4) increase in Total Scale (6)
(1) Production (5)
Capital (3)
1 2 — 10 —
2 4 100% 30 200% } Increasing
3 6 50% 60 100%
4 8 33% 80 33%
Constant
5 10 25% 100 25%
6 12 20% 110 10%
7 14 16% 120 9% Decreasing
8 16 14% 125 4%

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