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Unit 9: Cost Concepts

two variables are not known unless the qualitative relationship is quantifi ed. If one recalls the Notes

concept of returns to scale and assumes fixed factor prices, one could see three things:
1. When returns to scale are increasing, inputs are increasing less than in proportion to
increases in output. It follows that total cost also must be increasing less than in proportion
to output. This relationship is shown in Figure 9.5(a).
Figure 9.5(a): Increasing Returns to Scale

2. When returns to scale are decreasing, total cost increases at a faster rate than does output.
This relationship is shown in Figure 9.5(b).
Figure 9.5(b): Decreasing Returns to Scale

3. When returns to scale are constant, total cost and output move in the same direction and
same proportion. This is also shown in Figure 9.5(c).

Figure 9.5(c): Constant Returns to Scale

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