What Are Returns To Scale?
The law of variable proportions emerges because factor proportions change as long as 1 factor is held unchanged and the other is raised. What if both factors can change (differ)? Always remember that this can occur only in the long run. 1 special case, in the long run, happens when both the factors are raised by the same amount of factors are ascended up.
When a proportionate increase in all inputs results in the rise in output by the same proportion, the production function is said to exhibit Constant returns to scale (CRS).
When a proportionate increase in all inputs results in the rise in output by the larger proportion, the production function is said to exhibit an Increasing Returns to Scale (IRS).
Decreasing Returns to Scale (DRS) occurs when a proportionate increase in all inputs results in the rise in output by a smaller proportion.
For instance, presume in a manufacturing procedure, all inputs get doubled. As an outcome, if the output gets doubled, the manufacturing procedure displays CRS. If the output is less than doubled, then DRS occurs and if it is more than doubled, then IRS occurs.
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