Monday, May 19, 2014

Laws of Return to Scale

The law of variable proportion analyses the behaviour of output when one input factor is variable and the other factors are held constant. Thus it is a short run analysis. But in the long run all factors are variable. When all factors are changed in same proportion, the behaviour of output is analysed with laws of returns to scale. Thus law of returns to scale is a long run analysis. In the long period, output can be increased by varying all the input Factors this law is concerned, not with the proportions between the factors of production, but with the scale of production. The scale of production of the firm is determined by those input factors which cannot be changed in the short period. The term return to scale means the changes in output as all factors change in the same proportion. The law of returns to scale seeks to analyse the effects of scale on the level of output. If the firm increases the units of both factors labour and capital, its scale of production increases. The return to scale may be increasing, constant or diminishing.
Increasing Returns to Scale
When inputs are increased in a given proportion and output increases in a greater proportion, the returns to scale are said to be increasing. In other words, proportionate increase in all factors of production results in a more than proportionate increase in output It is a case of increasing returns to scale.
For example, if the inputs are increased by 40% and output increased by 50%, return to scale are increasing (= >1). It is the first stage of production.
If the industry is enjoying increasing returns, then its marginal product increases. As the output expands, marginal costs come down. The price of the product also comes down.
Constant Return to Scale
When inputs are increased in a given proportion and output increases in the same proportion, constant return to scale is said to prevail. For example, if inputs are increased by 40% and output also increases by 40%, the return to scale are said to be constant ( = 1). This may be called homogeneous production function of the first degree. In case of constant returns to scale the average output remains constant. Constant returns to scale operate when the economies of the large scale production balance with the diseconomies.
Decreasing Returns to Sale

Decreasing returns to scale is otherwise known as the law of diminishing returns. This is an important law of production. If the firm continues to expand beyond the stage of constant returns, the stage of diminishing returns to scale will start operate. A proportionate increase in all inputs results in less than proportionate increase in output, the returns to scale is said to be decreasing. For example, if inputs are increased by 40%, but output increases by only 30%, ( = < 1), it is a case of decreasing return to scale. Decreasing return to scale implies increasing costs to scale.


Absorption Costing (1) Accountancy (4) accounting for partnership firms (3) Accounting for Share Capital (3) accounts of non trading concern (3) advanced financial accounting (14) AHSEC (108) ahsec 11 (47) ahsec 12 (60) ahsec notes (104) AHSEC Question Papers (33) Assam Slet (10) bcfm (11) bills of exchange (6) branch accounting (3) Budgetary Control (3) Budgetary Control Notes (2) business communication (28) Business Environment Notes (7) business regulatory framewrok (47) Business Statistics Notes (23) cash flow statement (5) cbse 12 (19) cbse notes (27) commerce (13) company law (23) corporate accounting (33) corporate laws (14) cost accounting (63) cost and management accounting (34) cpt (36) cpt 200 (7) cpt notes (30) dibrugarh university (1086) dibrugarh university notes (571) dibrugarh university question paper (419) dibrugarh university solved papers (233) dibrugarh university syllabus (47) direct tax law (49) eco - 01 (4) ECO - 02 (2) ECO - 03 (2) ECO - 05 (6) ECO - 06 (1) ECO - 07 (1) eco - 08 (4) eco - 09 (1) ECO - 10 (2) ECO - 11 (3) ECO - 12 (7) ECO - 13 (2) ECO - 14 (4) entrepreneurship (14) fianancial accounting (3) financial accounting (48) Financial Accounting Notes (11) financial management (18) Financial statements analysis (14) funds flow statement (3) guwahati university (303) guwahati university syllabus (54) Hire Purchase (5) Human Resource Management (14) icwai (38) icwai notes (39) ignou solved assignments (83) ignou solved question papers (121) income from house property (5) income from salary (4) Income Under the head Salaries (11) information technology (10) Installment Purchase (4) issue of shares (4) kkhsou (13) (63) Management Accounting Notes (25) MCQ (11) paper I (1) paper II (9) paper III (1) principle of business mangement (16) Principles of Marketing Notes (16) royalty accounts (3) sale of goods act (8) semester I (157) Semester II (155) semester III (66) semester IV (148) semester V (101) semester VI (91) slet (13) Slet Ne (10) Small Business Management (8) solved assignments (22) UGC - NET: Commerce (08) (14) UGC - NET: Commerce (08) Paper II (3) UGC - NET: Commerce (08) Paper III (14) ugcnet solved question papers (23) Variance Analysis Notes (1)