Decreasing Returns to Scale:
When output increases in a smaller proportion with an increase in all inputs, decreasing returns to scale are said to prevail. When a firm goes on expanding by increasing all inputs, decreasing returns to scale set in. Decreasing returns to scale eventually occur because of increasing diflculties of management, coordination and control. When the firm has expanded to a very large size, it is diflcult to manage it with the same eflciency as before.
The Cobb-Douglas production function, explained earlier is used to explain“returns to scale” in production. Originally, Cobb and Douglas assumed that returns to scale are constant. The function was constructed in such a way that the exponents summed to a+1-a=1. However, later they relaxed the requirement and rewrote the equation as follows:
Q = K La C b
The Cobb-Douglas production function, explained earlier is used to explain“returns to scale” in production. Originally, Cobb and Douglas assumed that returns to scale are constant. The function was constructed in such a way that the exponents summed to a+1-a=1. However, later they relaxed the requirement and rewrote the equation as follows:
Q = K La C b
Where
‘Q’ is output, ‘L’ the quantity of labour and ‘C’ the quantity of capital, ‘K’ and ‘a’ and ‘b’ are positive constants.
If a + b > 1 Increasing returns to scale result i.e. increase in output is more than the proportionate increase in the use of factors (labour and capital).
a + b = 1 Constant returns to scale result i.e. the output increases in the same proportion in which factors are increased.
a + b < 1 decreasing returns to scale result i.e. the output increases less than the proportionate increase in the labour and capital.
Goods and Service Tax Book (Updated upto 20th January 2018)
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GST (Goods and Services Tax) Book -A student friendly Book. - Bharat Gurukul
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