Page 222 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-10: Isoquant Curve

Notes
Fig. 10.13

Y
IQ
3 Increasing
Returns to
IQ
2 Scale
IQ 1 C P
6 200
Capital 4 B

A 120
2
50

0 X
2 4 6
Labour

2. Decreasing Returns to Scale: Decreasing returns to scale is the situation where the ratio of production
does not increase even when the factors increase. In other words, if the changes happen with the
factors in a limited quantity, the ratio of production does not increase, and then this is the condition
of decreasing returns to scale. Figure 10.14 indicates that if the factor of production gets double then
the production does not double. This figure clarifies that when labour and capital get doubled, from 2
to 4 units, then the production does not double and it increases from 50 units to 80 units. The reason
behind this is decreasing returns to scale. Decreasing returns to scale happens due to diseconomies
of scale.

Fig. 10.14

Y Diminishing Returns to Scale
IQ
3
P
IQ 2
6 IQ 90
Capital 4 1 80

2
50
0 X
2 4 6
Labour

3. Constant Returns to Scale: Constant returns to scale is the situation where the extended ratio in
production is equal to extended ratio of factors. In other words, constant returns to scale means the
ratio of increment in factors and increment in production is same. If doubles the factors, production
is automatically doubled. It is shown in Fig. 10.15. Here factors and production are increasing in
similar ratio. Means when factors increase i.e., from 2 to 4 units, then production is double i.e., from
50 units to 100 units.

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