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Law of return to scale in economics
|Law of return to scale in economics by lasbrey20: 8:28 pm On July 31, 2018|
In the long run all factors of production are variable. No factor is fixed. Accordingly, the scale of production can be changed by changing the quantity of all factors of production.
Returns to scale relates to the behaviour of total output as all inputs are varied and is a long run concept”. Leibhafsky
Returns to scale are of the following three types:
Suppose, initially production function is as follows:
P = f (L, K)
Now, if both the factors of production i.e., labour and capital are increased in same proportion
The main cause of the operation of diminishing returns to scale is that internal and external economies are less than internal and external diseconomies.Constant returns to scale or constant cost refers to the production situation in which output increases exactly in the same proportion in which factors of production are increased. In simple terms, if factors of production are doubled output will also be doubled.
In this case internal and external economies are exactly equal to internal and external diseconomies. This situation arises when after reaching a certain level of production, economies of scale are balanced by diseconomies of scale. This is known as homogeneous production function. Cobb-Douglas linear homogenous production function is a good example of this kind. This is shown in diagram 10. In figure 10, we see that increase in factors of production i.e. labour and capital are equal to the proportion of output increase. Therefore, the result is constant returns to scale.
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