Returns to scale and its implications

1. Prof. M.P. Rege

2. ANSARI BUSHRA
03
VISHAL JADHAV
13
SALMAN KHATRI
23
MOMIN SAUD AHMED
33
MOHAMMED ISMAIL SAYYED
43
SOHINI SURANI
53

4. Production implies provision of
goods and services, often
described as ‘Commodities’.

5. A production
function refers to
the functional
relationship,
under the given
technology,
between physical
rates of input &
output of a firm,
per unit of time.
Q = f(L, M, N,K,T)

6. TYPES OF PRODUCTION
FUNCTION
SHORT RUN PRODUCTION
1 variable constant
Works in tandem with Laws
of variable Proportions
3 Stages –
Increasing returns
Diminishing returns
Negative returns

LONG RUN PRODUCTION
Both Variables
Works in tandem with Laws
of returns to scale
3 Stages –
Increasing returns to scale
Constant returns to scale
Diminishing returns to scale

8. In production, returns to scale refers to
changes in output subsequent to a
proportional change in all inputs (where
all inputs increase by a constant factor).
It is a long run production function
Q = f(a1,b1,c1,.....,n,T)

9.  Technique of
production is
unchanged
All units of factors are
homogenous
Returns are measured
in physical terms

10.  Increasing
returns to scale
Constant
returns to scale
Decreasing
returns to scale

11. Increasing returns to
scale occurs if a
proportional increase
in all inputs under
the control of a firm
results in a greater
than proportional
increase in
production.

SCALE OF
PRODUCTION
MARGINAL
RETURN

12. Technical and managerial indivisibilities
 Higher degree of specialization
Dimensional relations

13. Constant returns to
scale occurs if a
proportional increase
in all inputs under the
control of a firm
results in an equal
proportional increase
in production.
SCALE OF
PRODUCTION
MARGINAL
RETURN

14. 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.

15. Decreasing returns to
scale occurs if a
proportional increase
in all inputs under
the control of a firm
results in a less than
proportional increase
in production.
SCALE OF
PRODUCTION
MARGINAL RETURN

16. Size of the firms expands, managerial
efficiency decreases.
Limited resources.

17. An economy of scale exists when larger output is
associated with lower per unit cost.

18. ECONOMIES OF SCALE
Labour economies
Technical Economies
Marketing Economies
Managerial Economies

19. A diseconomy of scale exists when larger output
leads to higher per unit cost.

20. DISECONOMIES OF SCALE
Managerial Diseconomies
Marketing Diseconomies
Technical Diseconomies

21. ECONOMIES OF SCALE, DISECONOMIES
OF SCALE & RETURNS TO SCALE
Returns to scale are
the flip slide of
economies of scale
and diseconomies of
scale. However,
whereas economies
and diseconomies of
scale focus on cost,
returns to scale focus
on production.

22. Economies of scale indicate that long-run
average cost decreases, which corresponds to
increasing returns to scale in terms of
production.
Diseconomies of scale indicate that long-run
average cost increases, which corresponds to
decreasing returns to scale in terms of output.
Constant returns to scale for production terms
results when long-run average cost neither
increases nor decreases.
ECONOMIES OF SCALE, DISECONOMIES
OF SCALE & RETURNS TO SCALE

23. LIMITATION OF
RETURNS TO SCALE