What is the production function? Explain the law of Returns to Scale. Explain the reasons for returning to scale.
Production Function:- Production Function refers to the relationship between the quantity of goods produced ( Output ) and the factor of production ( Inputs ) necessary to produce it.
These are the main factors of production Labour (L), Capital (K), Material (M) and Land (S).
Definition
According to the KOUTSOYIANNIS, “The production is purely a technical relation which connects input factors and output factors”.
Meaning of law of return to scale- Return to scale describes the changes in production when all inputs are varied by the same proportion.
Definition of return to scale:- “The Return to scale refers to changes in total output as a result of changes in total input factor by the same proportion.
In other words:- Law of return to scale refers to increase in output as a result of increase in all factors of production in the same proportion. Such an increase in output is known as Return to scale. It is a long run concept. By gndupapers.online
Production function
P= f ( L, K )
L= Labour K= capital
If both the factors of production i.e labour ( L) and capital (K) are increased in the same proportion (m) then production function will be written as:
P= f ( ml, mk )
There are three aspect of Return to scale
- Increasing Return to Scale
- Constant Return to Scale
- Diminishing Return to Scale
1.Increasing Return to Scale:- When all factors of inputs are increased causes greater increase in output than input increase. Understand with the following figure.
Then increasing returns to scale occurred. Following Figure Shows that a 10% increase in all factor inputs causes a 15% increase in output. Again 15% increase in all factor increase causes 25% increase in output. Thus, any percentage increase in all input factors is causing a greater percentage increase in output. By gndupapers.online
- Causes of Increasing Return to Scale
There are two types of Causes
- Internal causes
- External Causes
Internal Causes
- Internal Causes
- Real Economies:- It deals with the reduction in the physical quantity of inputs due to labour skills, labour specialisation and labour division.
- Inventory Economies :- A big enterprise enjoys inventory economies. Because it has a large stock. When raw material is scarce in the market and sold at the highest price. The firm has no need to worry at all.
- Managerial Economies:- A firm production can engage efficient and talented managers. Thus all production will be increased due to decentralised work of the firm.
- Transport and Storage Economies:- A big firm has its own trucks which carry its raw material and finished production to market. Transport and storage help it to sell its products at favourable prices. By gndupapers.online
External Economies.
- Real Economies:- These firms are shared in by a number of firms and industry. These external economies include managerial techniques, Developed financial areas and roads.
- Economies of information:- Developed system of communication of a country will be helpful in increasing return in production.
2. Constant Return to Scale:- Constant Return to Scale occurs when a percentage increase in all factors of input increase causes the same increase in output. law of returns to scale
Above figure shows that a 10% increase in all factors of inputs causes a 10% increase in output. Again 20% increase in inputs causes 20% increase in output. Therefore, any percentage increase in inputs is matched with equal percentage increase in output.
- Causes of Constant Return to scale
( I ) Economies of scale give rise to increasing return to scale.
( II ) Diseconomies of scale lead to Decreasing Return to Scale.
( III ) This constant Return to Scale exists after the phase of increasing return to scale exhausts itself and before the phase of Decreasing return to scale sets in.
( IV ) Constant Return to Scale arises when economies are exactly balanced by Diseconomies. By gndupapers.online
3. Diminishing Return to Scale:- Diminishing Return to Scale occurs when a percentage increase in all factors of inputs causes a lesser increase in output. As 15% increase in all factors of inputs causes only 10% increase in output.
Above figure shows that 15% increase in all factor inputs causes only 10% increase in output. Again 25% increase in factor inputs causes 16.50% increase in output. Thus, Return to scale is thus diminishing.
- Causes of Diminishing Return to Scale
- External Diseconomies
- External Diseconomies
( I ) Unwieldy Management :- At the biggest firm management is difficult to carry out its managed functions. It becomes difficult to supervise the work spread all over. law of returns to scale
( 2 ) Technical Difficulties:- At certain points technical improvement can be carried out. But after that it becomes difficult to improve on it. Which becomes in economies causes Diseconomies of scale.
B. External Diseconomies
( I ) These Diseconomies are suffered by all firms. When the area of a firm expands beyond the limit then firms operating in that industry suffer external Diseconomies. Example:- Firms experience great difficulties in procuring raw material. Because of the large demand for raw materials, it has become scarce and expensive.
Cost of land for the new firms becomes prohibitive. gndupapers.online
A Brief Of Return To Scale
| Return To Scale Involves |
| Change In All factors of production in the same proportion |
| Law of Returns Always Long Run Analysis |
| Non-homogeneous production Function |
Conclusion :- Now we can understand the scale of Return in the production. Which passes through three stages. As increasing, diminishing and constant phases of return. We can also understand its causes due to which they occurred in the business. By gndupapers.online
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Essential question of business economics which you must learn.
law of returns to scale