The Laws Of Returns To ScaleThe laws of returns to scale explain the

behavior of output in response to a proportional and simultaneous change in inputs. Increasing inputs proportionately and simultaneously is, in fact, an expansion of the scale of production.

When a firm increases both the inputs proportionately, there are three possibilities

1. Total output may increase more than proportionately

2. Total output may increase proportionately3. Total output may increase less than

proportionately

Accordingly, there are three kinds of return to scale1. Increasing returns to scale2. Constant returns To Scale3. Decreasing returns to scale

Increasing Returns to Scale

The Causes of Increasing Returns To Scale1. Technical and managerial indivisibilities2. Higher degree of specialization3. Dimensional relations

Constant returns to scaleWhen the change in output is proportional to

the change in inputs, it exhibits constant returns to scale.

Constant returns to scale

Constant returns to scaleThe constant returns to scale are attributed

to the limits of the economies of scale. With expansion in the scale of production, economies arise from such factors as indivisibility of fixed factors, greater possibility of specialization of capital and labor, use of labor saving techniques of production, etc.

Decreasing returns to scale

Decreasing returns to scaleThe firms are faced with decreasing returns

to scale when a certain proportionate change in inputs, k & l, lead to less than proportionate change in output.

Causes of Diminishing return to scaleThe decreasing returns to scale are

attributed to the diseconomies of scale. The most important factor causing this is ‘the diminishing return to management’. Another factor is the exhaustibility of natural resources.