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.
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| 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 –
1st
– Increase return to scale
– in it, if we start increasing our input so our productions increase more than
our input
2nd
– 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
3rd
– 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.
