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Microeconomic Theory

Notes Thus, HR is a short run expansion path. It must be known that point E of Fig. 10.12 is a touching point
of Isoquant curve and iso-cost curve and it is equal to long run point. Point E and E of Fig. 10.12 are
1
2
not equal to point E and E of Fig. 10.11, the reason behind this is that the average of labour-capital
1
2
is not constant even the capital is constant. The averages are changed as per production.

10.13 Isoquants and Returns to Scale

To describe and drawing of Returns to Scale, economists have frequently used Isoquant curve analysis.
We have already described Returns to Scale in the units of Production Scale and Production Law.
We already know that returns to scale means the changes in production of a firm while in a given
technique, all the factors of production are changed in their ratio. The Returns to Scale is of three types:
(i) Increasing Returns to Scale, (ii) Decreasing Returns to Scale and (iii) Constant Returns to Scale. By
using iso-cost technique all three types can be described as below:

Assumptions

To describe the returns to scale by using equal production technique is based on following
assumptions:

(i) Firm is using only two factors of production, labour and capital.
(ii) The combination of labour and capital is used in a stable average.
( )
P
___
L

(iii) There is no change in price of factors, so the ratio of price-factor always stable .
P
(iv) The production technique occurs stable. K
Self Assessment
State whether the following statements are True/False:

9. To double the factor is to double the production.
10. The combination of labour and capital is used in a fixed ratio.
11. The production technique is stable.
12. Expansion path is the line which shows the minimum cost theory of producing various levels of
production when the price of factors remains stable.

Explanation

1. Increasing Returns to Scale: The increasing returns to scale is the situation where the quantity of
product increases in a ratio of increasing factors. In other words, if the average production increases
by increasing fixed changes in factors, it is the stage of increasing returns to scale. In increasing
returns to scale, if the factors of production are doubled, then the quantity of production gets more
than double. As shown in Fig. 10.13, as soon as the labour and capital doubles from 2 to 4 units,
then the production occurs just double i.e. from 50 units to 120 units. The increasing return to scale
is also called Economies of Scale.

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