Returns To Scale.ppt 3x81y

Returns to scale The changes in the Total output in response to the proportionate changes in the input.

Three possibilities of the total output. • The total output may increase proportionately • The total output may increase more than proportionately • The total output may increase less than proportionately

Mathematical Increasing Returns to scale if ∆ Q/ Q > ∆ F /F Constant returns to scale if ∆Q/Q = ∆ F/F

Decreasing returns to scale if ∆ Q/Q < ∆ F/F. Where ∆ Q is increase in Quantity ∆ F is increase in Factor.

Increasing returns to scale The increase in all factors leads to more than proportionate increase in output, return is said to be increasing. Thus doubling of the scale will result in more than the double. Eg: when 1 laborer and 2 acres of land employed the total product is 4 units of corn. when the inputs are doubled i.e. 2 and 4 the output is 6 units .

Increasing returns to scale Factors Labor : Land

Total Product

Marginal Product or Returns in units

1:2

4

4

2: 4

10

6

3: 6

18

8

4: 8

28

10

Stage I

Increasing returns to scale cannot be experienced by the firm indefinitely .Firms will slowly enter the phase of constant returns to scale.

Constant Returns to scale Factors X : Y

Total Product

Marginal Product or Returns in units

5 : 10

38

10

6: 12

48

10

Stage II

Table 2 indicates that in case of constant returns to scale the marginal output remains constant at 10 units. Doubling in all inputs simply results in doubling the output. This the second stage or constant returns to scale.

Decreasing Returns to Scale Decreasing returns to scale implies to the stage where proportionate increase in all inputs results in less than the increasing application of input. This is the third stage. Factor X : Y

Total Product

Marginal Product

7 : 14

56

8 Stage III

8: 16

52

6

Increasing Returns to Scale • X – axis measure units of labor ( L ) and Y – axis measures the units of land (A). • Isoquants shows the increase in output. • PQ shows the scale of expansion of firm ab=bc=cd. • Isoquant is equidistant which denotes the constant increase input combinations.

Example • The combination of 2A + 4 L, the output increases by 100(200-100). • Second condition input combination output increases by 300 (700-400). • Total output increases at an increasing rate as the result of a constant increase in input combination.

Constant Returns to Scale • X – axis measure units of labor ( L ) and Y – axis measures the units of land (A). • The output shows an increase by the constant number. Eg: 2A + 4L of input combinations the total output increase by the constant number. • This kind of relationship between the input combinations and the output is constant returns to scale.

Decreasing returns to Scale • X – axis measure units of labor ( L ) and Y – axis measures the units of land (A). • PQ is the line which shows a constant increase in input combination but by the decreasing marginal increase in the total output. Eg: when input combinations increase from point a to b , b to c, c to d, the total output increases by 100,50 and 25.

Conclusion. Returns to scale is a long run phenomenon which offers an opportunity to the production manager to increase the employment of all factors of production by the given percentage according to the market and resource feasibilities.