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–
- this law assumes– all factors [inputs] are variable but enterprise is fixed.
- A worker works with given tools and implements.
- New technological changes are absent.
- 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——————————-#————————————-