Returns to scale

RETURNS TO SCALE

Presented by:Shivam Jhajj (Roll No. 05)

What is ? Inputs Outputs Land Labor Goods or Capital Services Machinery Raw Material

Production Function Production Function is an equation which specifies

the maximum no. of output which can be generated from the available set of inputs.

Q= f ( L,K,M….)Q= Quantity

L= LaborK= Capital

M= Machinery

Long Run As in short-run, only one factor of production is considered

variable, all others are fixed.

On the other hand, if the production is to be increased for long run, all the factors of production are considered variable.

Two Input Production Function

Set of inputs will vary from firm to firm.

So, for simplifying the equation, we assume that a firm produces only one output with two inputs, labor (L) and capital (K).

Q= f (L,K)

ISO-QUANT CURVE

Same quantityof output is producedwhile changing thequantities of inputs.

I.e., with more units ofcapital, the lesser unitsof labor are to beemployed to havesame level of output.

Features of Iso-quant

Iso-quant have a negative slope.

Iso-quant are convex to origin.

Two iso-quant curves never intersect each other.

Upper isoquant represents higher level of output.

No iso-quant curve touches either of the axis, X or Y

RETURNS TO SCALE Degree by which output will change as a result of

change in quantity of all the factors of input Applies in long run.

Three stages of returns to scale:-1. Constant returns to scale.2. Increasing returns to scale.3. Decreasing returns to scale.

Assumptions of the law

All the factors of production are variable. (such as

land, labor, capital)

Technology remains constant.

Outputs are measured in physical terms.

The market is perfectly competitive.

Constant returns to scale

When change in output is proportional to change in input.

Increasing returns to scale

When change in output is proportionally more than change in input.

Decreasing returns to scale

When change in output is proportionally less than change in input.

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