Returns to scale refers to a relationship which shows the degree of change in output caused by change in quantities of all inputs in a fixed proportion. The concept of returns to scale is a long-run concept, because it refers to a case where all inputs are variable.
In this context, it is also important to distinguish returns to scale from returns to a factor. Instead of all factors, when a relationship specifies change in output as a result of a given change in quantity of only one factor of production, while keeping the others unchanged, it is termed as returns to a factor.
There are Three Types of Returns to Scale:
(a) Increasing Returns to Scale:
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When all inputs are increased by a given proportion and the output increases by more than that proportion, it is called increasing returns to scale. For instance, if all inputs are doubled and output increases by three times, then that kind of input-output relationship is referred to as increasing returns to scale.
Figure 8.12 shows the case of increasing returns to scale. Suppose, in a particular production process, 10 units of capital and 20 units of labour make 15 units of output. When capital is increased to 20 units and labour is increased to 40 units, output is also expected to get doubled i.e., from 15 units to 30 units. But in this case, since a return to scale is increasing, output increases to 35 units, which is more than double.
(b) Decreasing Returns to Scale:
When all inputs are increased by a given proportion and the output increases by less than that proportion, it is called decreasing returns to scale. For example, if all inputs are increased by three times and yet output gets only doubled, then that kind of input-output relationship is referred to as decreasing returns to scale.
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Figure 8.13 explains decreasing returns to scale. Suppose, in a particular production process 10 units of capital and 20 units of labour make 15 units of output. When quantity of both the inputs are doubled, i.e., capital increases to 20 units and labour increases to 40 units, output is also expected to get doubled i.e., from 15 units to 30 units. But in case of decreasing returns to scale, output increases by 10 units, which is less than double.
(c) Constant Returns to Scale:
When all inputs are increase by a given proportion and the output increases by the same proportion, it is called constant returns to scale. For example, if all inputs are doubled and output also gets doubled, then that kind of input- output relationship is referred to as constant returns to scale.
Figure 8.14 provides the diagrammatic description of constant returns to scale. Suppose, in a particular production process 10 units of capital and 20 units of labour make 15 units of output. When both the inputs are doubled, i.e., capital is increased to 20 units and labour is increased to 40 units, output also gets doubled i.e., it increases from 15 units to 30 units.