RETURN TO SCALE

Returns to Scale:

• We shall now study about changes in output when all factors of production in a particular production function are increased together. In other words, we shall study the behaviour of output in response to a change in the scale.
•  A change in scale means that all factors of production are increased or decreased in the same proportion. Change in scale is diuerent from changes in factor proportions. Changes in output as a result of the variation in factor proportions, as seen before, form the subject matter of the law of variable proportions. 
• On the other hand, the study of changes in output as a consequence of changes in scale forms the subject matter of returns to scale which is discussed below. It should be kept in mind that the returns to scale faced by a firm are solely technologically determined and are not influenced by economic decisions taken by the firm or by market conditions. 
• Returns to scale may be constant, increasing or decreasing. If we increase all factors i.e., scale in a given proportion and output increases in the same proportion, returns to scale are said to be constant. Thus, if doubling or trebling of all factors causes a doubling or trebling of output, then returns to scale are constant. 
• But, if the increase in all factors leads to more than proportionate increase in output, returns to scale are said to be increasing. Thus, if all factors are doubled and output increases more than double, then the returns to scale are said to be increasing. 
• On the other hand, if the increase in all factors leads to less than proportionate increase in output, returns to scale are decreasing. It is needless to say that this law operates in the long run when all the factors can be changed in the same proportion simultaneously.

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It should be remembered that increasing returns to scale is not the same as increasing marginal returns. Increasing returns to scale applies to ‘long run’ in which all inputs can be changed. Increasing marginal returns refers to the short run in which at least one input is fixed. The existence of fixed inputs in the short run gives rise to increasing and later to diminishing marginal returns.