Return to Scale - B.E (CS/IT) - EE&FA/C - DR.K.BARANIDHARAN, SRI SAIRAM INSTITUTE OF TECHNOLOGY,...

8/11/2019 Return to Scale - B.E (CS/IT) - EE&FA/C - DR.K.BARANIDHARAN, SRI SAIRAM INSTITUTE OF TECHNOLOGY, CHENNAI

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Prepared by :

Dr. K. BARANIDHARAN

PROF.MBA

SRI SAIRAM INSTITUTE OF TECHNOLOGY

CHENNAI

ENGINEERING ECONOMICS

AND

FINANCIAL ACCOUNTING

Sri Sairam Institute of Technology 2


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EngineeringEconomics& Financial

Accounting

Eefa

315 August 2014


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Return to scale


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RETURNS TO SCALE

Return to scale refer to the return

enjoyed by a firm as a result of change in

all inputs. It explains the behavior of the returns

when inputs are changed

simultaneously.

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Returns to Scale

Returns to scale is the rate at which

output increases in response to

proportional increases in all inputs. In the eighteenth century Adam Smith

became aware of this concept when he

studied the production of pins.

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Returns to Scale

Adam Smith identified two forces that

come into play when all inputs areincreased.

A doubling of inputs permits a greater division

of labor allowing persons to specialize in the

production of specific pin parts.

This specialization may increase efficiency

enough to more than double output.

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Constant Returns to Scale

A production function is said to

exhibit constant returns to scale if a

doubling of all inputs results in aprecise doubling of output.

This situation is shown in Panel .

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Capital

per week

4

A

3

2

1

Laborper week

1 2 3

(a) Constant Returns to Scale

40

Isoquant Maps showing Constant, Decreasing, and

Increasing Returns to Scale

q = 10

q = 20

q = 30

q = 40

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Decreasing Returns to Scale

If doubling all inputs yields less than

a doubling of output, the production

function is said to exhibit decreasingreturns to scale.

This is shown in Panel

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Capital

per week

4

A

3

2

1

Laborper week

1 2 3


40

Capitalper week

4

A

3

2

1

Laborper week

1 2 3

(b) Decreasing Returns to Scale

40



q = 10 q = 10

q = 20q = 20

q = 30q = 30

q = 40

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If doubling all inputs results in more than a

doubling of output, the production function

exhibits increasing returns to scale.

This is demonstrated in Panel

In the real world, more complicated

possibilities may exist such as a production

function that changes from increasing to

constant to decreasing returns to scale.

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Capital

per week

4

A

q = 10

3

2

1

Laborper week

1 2 3


40

Capital

per week

4

A

3

2

1

Laborper week

1 2 3

(c) Increasing Returns to Scale

40

Capitalper week

4

A

3

2

1

Laborper week

1 2 3

(b) Decreasing Returns to Scale

40



q = 10 q = 10

q = 20

q = 20q = 20

q = 30 q = 30

q = 30

q = 40

q = 40

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Return to Scale - B.E (CS/IT) - EE&FA/C - DR.K.BARANIDHARAN, SRI SAIRAM INSTITUTE OF TECHNOLOGY,...

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Transcript of Return to Scale - B.E (CS/IT) - EE&FA/C - DR.K.BARANIDHARAN, SRI SAIRAM INSTITUTE OF TECHNOLOGY,...