Factor combination in the long run, Managerial Economics

Factor combination in the long run

In the long run it is possible to vary all factors of production. The firm is therefore restricted in its activities by the law of diminishing return to scale.

The law states that successive proportionate increments in all inputs simultaneously will lead eventually to a less than proportionate increase in output.

Returns to scale refers to the rate at which output increases as all inputs are increased simultaneously.  In the illustration below, labour and land are assumed to be the factors of production.

Land (units)                 Labour (units)             Output (units)

30                                             5                                                          41                     Increasing returns

60                                             10                     '                                   100

90                                             15                                                         168                   Constant returns

120                                           20                                                         224

150                                           25                                 '                       275                   Decreasing returns

180                                           30                                                         300

When land increases from 30 units to 60 units and labour from 5 units to 10 units, each has doubled or increased by 100%.  Output increases from 41 units to 100 units i.e. by more than 100.  When land increases from 60 to 90 units, each has increased by 50%.  Output increases from 100 to 168 i.e. by more than 50%.  In each of these cases when the inputs are increased in a certain proportion, output increases in greater proportion.  We say that the firm is in a stage of increasing returns to scale.

This should not be confused with the stage of increasing   returns in the short run.  In the short run.  In the short run the increasing returns  to the variable factor, and the scale of production fixed.

When land is increased from 90 to 120 units and labour from 12 to 16 units, each has increased by 1/3 or 33 1/3% output increases from 168 to 224, i.e. by 1/3 or 33 1/3.  Thus, when the input factors are increased in a certain proportion, output increases in the same proportion.   This is a stage of constant returns to scale.

When land is increased from 120 to 150 units and labour fro 20 to 25 units, each has increased by 25%.  Output increases from 224 to 275 units i.e. by less than 25%.  When land increases from 150 to 180 and labour from 25 to 30 units, each has increased by 20%, output increases from 275 to 300 i.e. by less than 20%.  In both of these cases, when the inputs are increased in a certain proportion output increases in 20%.  The firm is said to be in a stage of decreasing returns to scale  not to be confused with diminishing returns to the variable factor in the short run.

Posted Date: 11/27/2012 7:21:37 AM | Location : United States







Related Discussions:- Factor combination in the long run, Assignment Help, Ask Question on Factor combination in the long run, Get Answer, Expert's Help, Factor combination in the long run Discussions

Write discussion on Factor combination in the long run
Your posts are moderated
Related Questions

howw much should the firm produce to maximize its profits

What is increasing marginal cost? Felix’s marginal cost is greater the more lawns he has previously mowed. It is, every time he mows a lawn, the extra cost of doing still anoth


Supplementary Reserve, Requirements/Special Deposit If the Central Bank feels that there is too much money in circulation, it can in addition require commercial banks to mainta

The owner of a patent has a contract with a cooperation that gives it right to use the patent. The cooperation will pay the patent owner $2500 yearly for the next 5 years, $3000 fo

NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT   During 1970s economists encountered a puzzle  in  the sense that  inflation and unemployment  data  did not  fit  into the Phi


Q. Illustrate Fiscal Monopoly? Fiscal Monopoly:   To stop exploitation of consumers andemployees, government nationalises many industries and obtains fiscal monopoly power ove

distinguish between industry demand and firm demand..