Short run is long enough for the producers but only for increasing the labour input alone. As against this, long run refers to that time period which is long enough for them to increase capital input also.
Production in the long run, thus, takes place under two variable factors labour and capital. The two are combined by producers in a fixed ratio called the scale. For instance, if 6 units of labour input are to be combined with 2 units of capital input, the scale is 6: 2 (or 3: 1). Now suppose more output is desired to be produced.
This would require more units of labour and capital inputs. The two would have to be increased but in such a way that the ratio (scale) of the two remains unchanged. The increased inputs, thus, can be (9, 3), (12, 4), (15, 5) or any other combination of the two but only in the ratio (scale) of 3: 1.
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Quantities of output realised in consequence to the increasing units of the two inputs in a given scale are referred to as the returns to scale. Let us construct a numerical illustration for the purpose. Let the scale be 5: 2. Units of output realised in consequence to increasing doles of inputs in this scale are, say, as shown in (Table 4.2).
Where
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IRS = Increasing Returns to Scale
CRS = Constant Returns to Scale
DRS = Decreasing Returns to Scale
As factor inputs are increased from combination (5, 2) to combination (20, 8), output increases from 10 units to 40 units first by 5 units, then by 10 units and finally by 15 units. This implies that the total product increases at an increasing rate in response to the increasing inputs in the scale of 5: 2. This phenomenon is called the Increasing Returns to Scale (IRS).
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As factor inputs are increased from combination (15, 6) to (30, 12), output increases from 25 units to 70 units at the rate of 15 units each time the factor inputs are increased in the scale of 5: 2. This phenomenon is termed as Constant Returns to Scale (CRS).
In like manner, as factor inputs are increased from the combination (25,10) to (45,18), output increases from 55 units to 88 units, first by 15 units, then by 10 units, thereafter by 5 units, and finally, by 3 units.
This implies that the total product increases at a decreasing rate in response to increasing inputs in the scale of 5: 2. This phenomenon is termed Decreasing Returns to Scale (DRS).
The law of returns to scale can be stated as a combination of IRS, CRS and DRS. According to the law, when units of the variable factors of production are increased in a given scale, the total product initially increases at an increasing rate (IRS), then at a constant rate (CRS) and finally at a decreasing rate (DRS).
IRS, CRS and DRS taken together are referred to as the Diminishing Returns to Scale. The reason for this is the long run tendency of production to stabilise in the stage
of decreasing returns to scale.
The preceding stages turn out to be the passing phases in production. IRS, CRS and DRS are best explained with the help of isoquants. You will study about them in higher classes as they are beyond the scope of this book.
Returns to scale can also be analysed mathematically if the production function were given. We will do that in the next section (Section 4.5) while distinguishing between returns to variable proportions and returns to scale.