- Returns to scale
- Returns to scale describe how much a firm's output changes when it raises all of its inputs by the same proportion in the long run.
- Diminishing marginal returns
- Diminishing marginal returns occur when adding more of one variable input to a fixed input makes each extra unit add less output.
Types of returns to scale
Can you name the three types of returns to scale?
Each type compares the rise in output with the rise in every input that caused it.
Increasing returns to scale occur when raising every input by a given proportion raises output by a larger proportion.
Can you think of an example?
A bottling firm doubles its staff, machines and floor space, and output rises from 10,000 to 25,000 bottles a week: inputs up 100 per cent, output up 150 per cent.
Constant returns to scale occur when raising every input by a given proportion raises output by exactly the same proportion.
Can you think of an example?
One typist with one computer types five letters an hour. Three typists with three computers type fifteen. Inputs and output have both tripled.
Decreasing returns to scale occur when raising every input by a given proportion raises output by a smaller proportion.
Can you think of an example?
A call centre doubles its staff, desks and phone lines, but calls answered rise only from 2,000 to 3,000 a day, a 50 per cent rise, because supervisors struggle to coordinate the larger team.