Page 173 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes (i) The percentage increment of labour and capital in Table 5 is done by following—
21
−
Percentage change in labour = × 100 = 100%
1
32
−
= × 100 = 50% etc.
2
Thus, the percentage of capital calculates
42
−
= × 100 = 100%
2
−
64
= × 100 = 50% etc.
4
This clarifies that the percentage changes in labour and capital is equal to each other because there is
equal changes in their average.
(ii) The percentage changes of total production is described in Table 5 as follows—
30 − 10
= × 100 = 200%
10
30 − 10
= × 100 = 100% etc.
10
8.15 Three Different Situations of Returns to Scale
There are 3 different stages to returns to scale:

(i) Increasing Returns to Scale
(ii) Constant Returns to Scale
(iii) Diminishing Returns to Scale

(i) Increasing Returns to Scale
Increasing Returns to Scale occurs when a given percentage increase in all factor inputs (in some constant
ratio) causes proportionately greater increase in output. So if the increase of 10% to the production factors
labour and capital and it increases the production by 15%, then it is called Increasing Returns to Scale.
Figure 8.6 indicates that the increment of 10% in production factors increases the production by 15%
and if increases more by 15% then the production increases by 25%. Thus the law of Increase Returns to
Scale happens when average increment of production is more than the average in production factors.
Fig. 8.6

Y
Q
25
% Increase in output 20 Increasing
returns
to scale
15

10
5

O x
5 10 15 20 25
% Increase in all factor inputs
(Factor ratio remaining constant)

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