Returns to Scale
AmosWEB (reference below) describes increasing returns to scale as resulting when long run production changes are greater than the proportional changes in all inputs used by a firm.
AmosWEB goes on to say:
“Suppose, for example, that The Wacky Willy Company employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed Amigos (those cute and cuddly armadillos, tarantulas, and scorpions) each month. Increasing returns to scale exists if the scale of operation expands to 2,000 workers in a 10,000 square foot factory (a doubling of the inputs) and production increases by more than 2 million Stuffed Amigos.
“The anticipated pattern for most production activities is that increasing returns to scale emerge for relatively small levels of production, which is then followed by constant returns to scale and decreasing returns to scale.
“Increasing returns to scale are the flip slide of economies of scale. Whereas economies of scale focus on changes in average cost, increasing returns to scale focus on production. Economies of scale indicate that long-run average cost decreases, which corresponds to increasing returns to scale in terms of output.
“Do not confuse increasing returns to scale with increasing marginal returns. While these phrases sound similar, they are quite different. Increasing returns to scale relate to the long run in which all inputs are variable. Increasing marginal returns related to the short run in which one or more input is variable and one or more input is fixed. The existence of fixed inputs in the short run gives rise to increasing marginal returns. In particular, decreasing marginal returns result because the capacity of the fixed input or inputs is being reached. However, in the long run, there are no fixed inputs.”
Atlas topic, subject, and course
AmosWEB, Increasing Returns to Scale, at http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=increasing+returns+to+scale, accessed 19 May 2016.
Page created by: Ian Clark, last modified 19 May 2016.