Returns to scale, Microeconomics

Returns to Scale

Measuring relationship between scale (size) of a firm and output

1. Increasing returns to scale: output more than doubles when all the inputs are doubled

- Larger output associated with the lower cost (or autos)

- One firm is more efficient than many (or utilities)

- The isoquants get closer together

1015_increasing return to scale.png

2. Constant returns to scale: output doubles when all the inputs are doubled.

  • Sizeof the commodity does not affect productivity
  • Can have a large number of producers
  • Isoquants are equidistant apart

    1411_decreasing return to scale.png
    3. Decreasing returns to scale: output less than doubles when all the inputs are doubled
  • Reducing efficiency with large size
  • Decrease of entrepreneurial abilities

• Isoquants become farther apart

1868_constant return to scale.png

Posted Date: 10/12/2012 1:55:52 AM | Location : United States

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