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

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
  
  
  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