Page 116 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 8: Laws of Production

Notes
Figure 8.5: DRS Production Function

It is also necessary for students to know the causes for increasing and decreasing returns to
returns to scale.

Notes
Causes of Increasing Returns to Scale
Increasing returns to scale are due to technical and/or managerial indivisibilities. One
of the basic characteristics of advanced industrial technology is the existence of mass
production methods. Mass production methods (like the assembly line car industry) are
processes available only when the level of output is large. They are more effi cient than
the best available processes for producing small levels of output. For example, increasing
returns of scale may happen because each worker has specialised in performing a simple
repetitive task rather than many different tasks. As a result labour productivity increases.
In addition, a larger scale of operation may permit the use of more productive specialised
machinery, which was not practically possible on a lower scale of operation.
Cause of Decreasing Returns to Scale

The most common causes are “diminishing returns to management”. The management is
responsible for the coordination of the activities of the various sections of the fi rm. Even
when authority is given to individual managers (production manager, sales manager, etc.)

the final decisions have to be taken by the board of directors. As the output grows, top
management becomes finally overburdened and hence less efficient in its role as coordinator

and ultimate decision-maker. Although advances in management science have developed
endless management techniques, it is still a commonly observed fact that as fi rms grow
beyond the appropriate optimal, management diseconomies come in. These may result
because as the scale of operations increases, communication difficulties make it more and

more difficult to run the business effectively.

Another cause for decreasing returns may be found in the exhaustible natural resources:

doubling the fi shing fleet may not lead to a doubling of the catch of fish; or doubling the

plant in mining or an oil extraction field may not lead to a doubling of output.

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