1. A PRSENTATION ON RETURN TO SCALE

2. RETURN TO SCALE It is type of long run production function. The term return to scale refers to the changes in output as all factors change by the same proportion. Return to scale relates to the behavior of total output as all inputs are varied and is a long run concept. In the long run, output can be increased by increasing all factors in the same proportion. Generally, law of returns to scale refer to an increase in output due to increase in all factors in the same proportion. Such an increase is called return to scale.

3. EXAMPLE OF RETURN TO SCALE Imagine a bakery that makes delicious cakes. If the bakery decides to hire more bakers, buy more ovens, and purchase additional ingredients, it will increase its scale of production. Returns to scale help us figure out whether making these investments will result in proportionally more cakes being produced or not. There are generally three scenarios to consider:

4. Increasing Returns: In this case, when the bakery expands its operations by adding more resources, it ends up producing more than proportionate additional cakes. So, if they double their inputs, they might produce more than double the number of cakes. Constant Returns: Here, when the bakery increases its scale by, say, doubling its inputs, it also doubles its cake production. The increase in inputs and output are in perfect balance. Decreasing Returns: In this situation, if the bakery invests in expanding its resources, it may produce less than proportionate additional cakes. For example, doubling the inputs might result in less than double the cake output.

5. ASSUMPTIONS OF RETURN TO SCALE Homogeneous production functions: The production process is consistent and uniform. Continuous production levels: Production occurs without abrupt interruptions. Fixed technology: The methods and technology used in production remain constant. Rationality: Firms aim to maximize output given available inputs. Perfect competition: Firms operate in a competitive market with no market power. Inputs are easily divisible: Resources like labor and capital can be divided and utilized efficiently. Constant input prices: The prices of inputs remain stable and do not fluctuate. Time frame: Analysis occurs in the long run, allowing for adjustments in all inputs.

6. PRODUCTION FUNCTION Production function is a concept in economics that explains the relationship between physical output and input. Output refers to the number of goods or services produced in a given time period. Input, on the other hand, is the number of resources or materials that are used to produce output. Production Function P=f(L,C) If both factors of production labour and capital are increased In same proportion that is, x, production function will be rewritten as P1=f(xL,xC)

7. WHAT IS THE RETURNS TO FACTOR Returns to factor refer to the concept in economics that evaluates how an increase in one specific input, such as labor or capital, affects the output of a production process. It helps us understand the relationship between the quantity of a particular input and the resulting output, indicating whether adding more of that input leads to proportionate, more than proportionate, or less than proportionate increases in production.

8. RETURNS TO FACTOR BETWEEN RETURNS TO SCALE AspectReturn to ScaleReturn to factor DefinitionExamines the impact of changing all inputs on overall output. Analyzes the effect of increasing a specific input (e.g., labor or capital) on output. Inputs Considered Considers changes in all production inputs simultaneously. Focuses on changes in a specific input while keeping other inputs constant. Types of Changes Increasing, constant, or decreasing returns. Determines whether input increase leads to proportionate, more than proportionate, or less than proportionate increase in output. Application Helps businesses decide on an optimal production scale for efficiency and productivity. Assists in making decisions about specific input usage for enhancing productivity. Example If a company doubles all inputs and output more than doubles, it exhibits increasing returns. If a company doubles its labor force to produce more units, it analyzes whether the output increases proportionately or not.

9. What do you understand by short run and long run In the short run, the result can be influenced by altering only variable factors, however, in the long run, the result may be altered by changing all production factors. In the long run, all elements are adjustable. However, the production variables are raised simultaneously. Demand is active in price determination in the near run since supply cannot be raised rapidly with an upsurge in demand. However, in the long run, both demand and supply play equal roles in the determining price because both may be increased.

10. Comparison Between Variable Factor and Fixed Factor Variable factors can be altered in the short run, however, fixed factors can’t be altered in the short run. Variable factors change quickly by output, while fixed factors do not change immediately with output. Variable factors comprise raw materials, casual labor, power, and fuel, while fixed factors include expenditures connected to structures, machinery and plant components, and more.

12. INCREASING RETURN TO SCALE When a firm grows its input resources and sees output rise more than proportionately, it experiences increasing returns to scale If all inputs are doubled, output will also increase at the faster Rate than double. This signifies improved efficiency and productivity with expanding production. REASONS Divison of labour Specialisation External economies of scale

13. CAUSES OF INCREASING RETURN TO SCALE Technical and managerial indivisibilities Higher degree of specialization Dimensional relations

14. CONSTANT RETURN TO SCALE Constant returns to scale happen when a firm’s input increase results in a proportionate output increase. If all inputs are doubled, output will also doubled. REASON Economies of scale is balanced by diseconomies of scale

15. CAUSES OF CONSTANT RETURNS TO SCALE Indivisibility of fixed factors. When the factors of production are perfectly divisible, The production function is homogenous of degree 1 showing Constant return to scale

16. DIMINISHING RETURN TO SCALE Decreasing returns to scale occurs when a firm’s input increase leads to a less-than- proportionate output increase. If all inputs are doubled, output will be less than doubled. Reasons Internal diseconomies External diseconomies

17. CAUSES OF DECREASING RETURNS TO SCALE Size of the firms expands, managerial efficiency decreases. Limited resources.

18. RETURN TO SCALE S.NO.SCALETOTAL PRODUCT MARGINAL PRODUCT PHASES 1.1 machine + 1 labor 4 4I 2.1 machine + 1 labor 10 6Increasing 3.1 machine + 1 labor 18 8Returns 4.1 machine + 1 labor 28 10II Constant 5.1 machine + 1 labor 38 10Returns 6.1 machine + 1 labor 48 10III 7.1 machine + 1 labor 56 8Decreasing 8.1 machine + 1 labor 62 6Returns

19. DISECONOMIES OF SCALE OF PRODUCTION INTERNAL DISECONOMIES Inefficient Management Technical Difficulties Production Diseconomies Marketing Diseconomies Financial Diseconomies EXTERNAL DISECONOMIES Diseconomies of Pollution Diseconomies of Strain on Infrastructure Diseconomies of High factor Prices

20. COMPARISON BETWEEN LAW OF RETURN AND RETURN TO SCALE FACTORSLAW OF RETURNRETURN TO SCALE Nature of InputsSome Inputs are FixedAll Inputs are variable Time ElementShort Run ProductionLong Run Production Function HomogeneityNon homogeneous Production Function Homogeneous Production Function Law of Increasing ReturnNon Linear, Non Homogeneous Production Function No linear, Homogeneous Function Law of Constant ReturnLinear, Non homogeneous Function Linear, Homogeneous Production Function Law of Diminishing ReturnNon Linear, Non Homogeneous Production Function Non Linear, Homogeneous Function