returns to scale and its implications
TRANSCRIPT
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Prof. M.P. Rege
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ANSARI BUSHRA 03
VISHAL JADHAV 13
SALMAN KHATRI 23
MOMIN SAUD AHMED 33MOHAMMED ISMAIL SAYYED 43SOHINI SURANI
53
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Production implies provision of goods and services, often described as ‘Commodities’.
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A production function refers to the functional relationship, under the given technology, between physical rates of input & output of a firm, per unit of time.
Q = f(L, M, N,K,T)
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TYPES OF PRODUCTION FUNCTION
SHORT RUN PRODUCTION 1 variable constant Works in tandem with Laws
of variable Proportions
3 Stages – Increasing returns Diminishing returns Negative returns
LONG RUN PRODUCTION Both Variables Works in tandem with
Laws of returns to scale
3 Stages –
Increasing returns to scale
Constant returns to scale Diminishing returns to
scale
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In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor).
It is a long run production function
Q = f(a1,b1,c1,.....,n,T)
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Technique of production is unchanged
All units of factors are homogenous
Returns are measured in physical terms
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Increasing returns to scale
Constant returns to scale
Decreasing returns to scale
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Increasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a greater than proportional increase in production.
SCALE OF
PRODUCTION
MA
RG
INA
L R
ETU
RN
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Technical and managerial indivisibilities
Higher degree of specialization
Dimensional relations
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Constant returns to scale occurs if a proportional increase in all inputs under the control of a firm results in an equal proportional increase in production.
SCALE OF PRODUCTION
MA
RG
INA
L R
ETU
RN
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Indivisibility of fixed factors.
When the factors of production are perfectly divisible, the production function is homogenous of degree 1 showing constant returns to scale.
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Decreasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a less than proportional increase in production.
SCALE OF PRODUCTION
MA
RG
INA
L R
ETU
RN
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Size of the firms expands, managerial efficiency decreases.
Limited resources.
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An economy of scale exists when larger output is associated with lower per unit
cost.
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ECONOMIES OF SCALE
Labour economiesTechnical EconomiesMarketing EconomiesManagerial Economies
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A diseconomy of scale exists when larger output leads to higher per unit
cost.
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DISECONOMIES OF SCALE
Managerial DiseconomiesMarketing DiseconomiesTechnical Diseconomies
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ECONOMIES OF SCALE, DISECONOMIES OF SCALE &
RETURNS TO SCALE Returns to scale are
the flip slide of economies of scale and diseconomies of scale. However, whereas economies and diseconomies of scale focus on cost, returns to scale focus on production.
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Economies of scale indicate that long-run average cost decreases, which corresponds to increasing returns to scale in terms of production.
Diseconomies of scale indicate that long-run average cost increases, which corresponds to decreasing returns to scale in terms of output.
Constant returns to scale for production terms results when long-run average cost neither increases nor decreases.
ECONOMIES OF SCALE, DISECONOMIES OF SCALE &
RETURNS TO SCALE
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LIMITATION OF RETURNS TO SCALE
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