Law of Return to Scale

Law of Return to Scale

Laws of return to scale describe the future relationship of all input and output. In the long run, we are able to bring change in our all fix and variable factor according to our requirement. If we are looking for a long term demand in particular so we are able to buy new land, new plant or hire new man power and meet the requirement. But this is for long run & we assume that we are able to make any changes in production line.

Law of Return to Scale

But we have some assumption for this like –

ü  All input are variables

ü  Clear road map for manpower and equipment are given

ü  No change in technology

ü  There are full competition

ü  Production are calculated in quantity

With these assumptions, we are able to bring change in our all input with-out a ratio. So we are able to bring a wide change in our production & with a high swing.

We have three stages for this –

1^st – Increase return to scale – in it, if we start increasing our input so our productions increase more than our input

2^nd – Constant returns to scale – when we continue increasing our input, after a stage our marginal production become equal with every new units and our total production have no multiple increment

3^rd – Diminishing return to scale – in final stage, our marginal production starts decline with every new unit. Our fix factor or fix equipment become less productive. There are also a lack of capital use and decision – making.