Return to scale

This ppt covers return to scale. All types with graphs.

1. RETURNS TO SCALE A PRESENTATION ON

2. SUBMITTED TO:- LOKESH PARIHAR 15EC48 MAHENDRA BISHNOI 15EC50 MAHESH CHOUDHARY 15EC51 MANISH SAINI 15EC52 Dr. SAROJ LAKHAWAT SUBMITTED BY:- BRANCH:- ELECTRONICS & COMMUNICATION GROUP :- EC2

3. Production Function is the relation between a firms physical production(output) and the material factors of production(input). Q= Where, Q is quantity of output L is labour C is capital N is land In simple form Q=   PRODUCTION FUNCTION

4. The production function is a technical or engineering relation between input and output. As long as the natural laws of technology remain unchanged, the production function remains unchanged. According to Prof. L.R. Klein

5. TYPES OF PRODUCTION FUNCTION SHORT RUN PRODUCTION LONG RUN PRODUCTION One variable factor All factors are v ariable Works in tandem with Laws of variable Proportions Works in tandem with Laws of return to scale 3 Stages- Increasing returns Negative returns Diminishing returns Increasing returns to scale Constant returns to scale Diminishing returns to scale

6. PRODUCTION FUNCTION Short Run Production Function Long Run Production Function Return to a Factor Law of Return to Scale All factors are Variable Laws of Variable Proportion One Variable Factor Return to Scale

7. FEATURE OF PRODUCTION FUNCTION Substitutability of factors Complementarity of factors Specificity of factors

8. SUBSTITUTABILITY OF FACTOR The factors of production or inputs are substitutes of one another which make it possible to vary the total output by changing the quantity of one or a few inputs, while the quantities of all other inputs are held constant.

9. COMPLEMENTARITY OF FACTORS The factors of production are also complementary to one another, i.e. the two or more inputs are to be used together as nothing will be produced if the quantity of either of the inputs used in the production process is zero.

10. SPECIFICITY OF FACTORS It reveals that the inputs are specific to the production of a particular product. Machines and equipment's specialized works and raw materials are a few examples of the specificity of factors of production.

11. RETURN TO SCALE It is type of Long Run Production Function The term return to scale refers to the changes in output as all factors change by the same proportion. - Koutsoyiannis Returns to scale relates to the behavior of total output as all inputs are varied and is a long run concept - Leibhfsky Explanation:- In the long run, output can be increased by increasing all factors in the same proportion. Generally, laws of returns to scale refer to an increase in output due to increase in all factors in the same proportion. Such an increase is called return to scale.

12. RETURN TO SCALE Production Function P= If both factors of production labour and capital are Increased in same proportion i.e., x , production function will be rewritten as P1=  

13. RETURN TO SCALE If increases in the same proportion as the increase in factors of production i.e. =x, it will be constant return to scale If incteases less then the proportionate increase in the factors of production i.e. <x, it will be diminishing return to scale. If increases more than proportionate increase in the factors of production i.e., <x , it will be increasing return to scale.  

14. RETURN TO SCALE S.No . Scale Total Product Marginal Product Phases 1. 2. 3. 4. 1 machine + 1 labour 2 machine + 2 labour 3 machine + 3 labour 4 machine + 4 labour 4 10 18 28 4 6 8 10 I Increasing Returns 5. 6. 5 machine + 5 labour 6 machine + 6 labour 38 48 10 10 II Constant Return 7. 8. 7 machine + 7 labour 8 machine + 8 labour 56 62 8 6 III Decreasing Returns

15. EXAMPLE OF RETURN TO SCALE Barry’s barbershop was experiencing what it thought was overwhelming customer purchases. In one week the shop served 250 clients. To capitalize on this market, Barry hired 2 additional barbers, which gave him a total of 10 barbers. In this case the barbers were the input of resource, increased by 25%. As a result, the barbershop experienced average weekly sales of 320 for the next five weeks, an increase in output of 28%, increasing returns to scale. If instead the barbershop had made 225 sales after the increase in input, it would have experienced decreasing returns to scale.

16. INCREASING RETURN TO SCALE If all inputs are doubled, output will also increase at the faster rate than double. Reasons Division of labour Specialisation External economies of scale

17. CAUSES OF INCREASING RETURNS TO SCALE Technical and managerial indivisibilities Higher degree of specialization Dimensional relations

18. CONSTANT RETURN TO SCALE If all inputs are doubled, output will also doubled. Reason Economies of Scale is balanced by diseconomies of Scasle

19. CAUSES OF CONSTANT RETURNS TO SCALE Indivisibility of fixed factors. When the factors of production are perfectly divisible, the production function is homogenous of degree 1 showing constant returns to scale.

20. DIMINISHING RETURN TO SCALE If all inputs are doubled, output will be less than doubled. Reasons Internal diseconomies External diseconomies

21. CAUSES OF INCREASING RETURNS TO SCALE Size of the firms expands, managerial efficiency decreases. Limited resources.

22. DISECONOMIES OF SCALE OF PRODUCTION INTERNAL DISECONOMIES Inefficient Management Technical Difficulties Production Diseconomies Marketing Diseconomies Fnancial Diseconomies EXTERNAL DISECONOMIES Diseconomies of Pollution Diseconomies of Strain on Infrastructure Diseconomies of High Factor Prices

23. Factors Laws of Return Return to Scale Nature of Inputs Some Inputs are Fixed All Inputs are Variable Time Element Short Run Production Function Long Run Production Function Homogeneity Non Homogeneous Production Function Homogeneous Production Function Law of Increasing Return Non Linear, Non Homogeneous Production Function Non Linear, Homogeneous Production Function Law of Constant Return Linear , Non Homogeneous Production Function Linear, Homogeneous Production Function Law of Diminishing Return Non Linear, Non Homogeneous Production Function Non Linear, Homogeneous Production Function COMPARISON BETWEEN LAWS OF RETURN AND RETURN TO SCALE

24. RESOURCES Exonomicsdiscussion.net Images.google.com Slideshare.net Wikipedia.com

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