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By

Mrs. N. Jayaprada

Law of Returns to Scale

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The Law Of Returns To Scale

Production Function All variable inputs

The laws of returns to scale explain the behavior of

output in response to a proportional and

simultaneous change in inputs.

Increasing inputs proportionately and simultaneouslyis, in fact, an expansion of the scale of production.

All inputs are changed in the same proportion.

Definition: It refers to the degree by

which the level of output changes in

response to a given change in all the

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Possibility of outcomes

Total output may increase more than proportionately

Total output may increase equally proportionately

Total output may increase less than proportionately

Accordingly, there are three kinds of return to scale

Increasing returns to scale

Constant returns to Scale

Decreasing returns to scale

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Factory

Units of

Land

(in acres)

Units of

labour

(No. )

Units of

capital

(in lakhs)

% increase in

labour & land

capital

Total

product

% increase

in total

product

Returns to

scale

1 10 100 - 100 -

2 20 200 100 220 1203 30 300 50 350 59 Increasing

4 40 400 33.33 500 42.9

5 50 500 25 625 25 Constant

6 60 600 20 750 20

7 70 700 16.66 860 14.66

8 80 800 14.29 940 9.3 Decreasin

g

9 90 900 12.5 1000 6.4

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Increasing Returns to Scale

When the proportionate increase in output is

greater than proportionate increase in allinputs. Economies of Scale

The Causes

Technical and managerial indivisibilities

Higher degree of specialization

Dimensional relations

Division of labour

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Constant Returns to Scale

When the proportionate increase in output is

equally proportionate increase in input.

The Causes limits of the economies of scale.

With expansion in the scale of production,

economies arise from such factors as indivisibility

of fixed factors, greater possibility ofspecialization of capital and labor, use of labor

saving techniques of production, etc. are limited

up to a level

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Decreasing Returns to Scale

When the proportionate increase in output is lessthan proportionate increase in all inputs.Diseconomies of scale

The causes

Diseconomies of scale.

The most important factor causing this is the

diminishing return to management.

Another factor is the exhaustibility of natural

resources.

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Economies of ScaleInternal Economies Economies of

increasing plant size.REAL ECONOMIES

Managerial Economies

Specialisation of management Decentralisation

Teamwork experience

Modern managerial and organisational techniques.

Marketing Economies

Advertising economies

Exclusive dealers with after-sale service

obligations

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Pecuniary Economies

Savings in expenses because of bulk buyingand selling

Bulk buying of materials

Lower cost of capitalAdvertising at large scale at lower rate

Less per unit rate of transportation

Lower wages and salaries because of prestige of

the firm.

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External Economies

Outside the firm, from improvement of theenvironment in which the firm operates.

Combined R&D

Expansion of Industry

Specialised firms for By-products and waste

materials

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Diseconomies of Scale

Average cost of production increases

Technical inefficiencies

Human and behavioural problems red tapism

personaltouch

control loss

Management problems improper supervision,

regulation

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Queries???

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Thank

Q