The law of Returns to Scale.

                                           The law  of returns  to scale  describes the  relationship  between  outputs   and the  scale  of  inputs  in  the  long-run   when  all  the  inputs  are  increased  in  the  same  proportion .   To  meet  a long – run  change  in  demand  the firm  increases  its scale  of  production by  using  more  space , more  machines  and  labors  in  the  factory.  

As  we know  that  in economics  every  principle is  based on some assumptions. So the’ law  of returns to scale’  is  also based on some assumptions  which is  as important as  principle is.  Here  is  assumptions–

  1. this  law assumes– all  factors [inputs] are variable  but  enterprise  is fixed.
  2.  A  worker works  with given  tools  and implements.
  3.  New  technological  changes are  absent.
  4. There is  perfect  competition and,

The  product is  measured in quantities.                                                                                                                         Given  these  assumptions,  when  all inputs are increased  in  unchanged  proportions and  the  scale  of  production is  expanded  the  effect on  output shows three  stages . Firstly , returns  to scale  increase  because the  increase  in  total  output is  more than  proportional  to  the  increase in  all  inputs. Secondly , returns  to   scale  become  constant  as  the  increase  in total  product  is  in  exact  proportion  to  the  increase in inputs. Lastly , returns  to scale diminish  because  the  increase in output  is  less  than  proportionate  to  the  increase  in inputs.   This can be explained  by  table  and diagram also  but I  do not  want our readers to be bored  by going through these things.   

                                                     In  reality  ,  it  is  possible  to  find  cases  where  all  factors  have tended  to  increase ,   whereas  all  inputs  have  increased,  enterprise  has  remained  unchanged. In  such  a  situation  , changes  in  output  can not be  attributed  to a  change  in  scale  alone . It  is  also due  to  a  shift  in  factor  proportions .  Thus  in  the  real  world  the  law  of  variable  proportions  is  applicable.————-#———————END——————————-#————————————-

                                                                                                                                      

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