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AGGREGATE PRODUCTION FUNCTION: A relation between the total production of real output for an economy and the amount of labor input. The aggregate production function is comparable to the standard production function used in the microeconomic analysis of firm behavior but is applied to the macroeconomic study of aggregate supply, resource markets, and employment. It is typically assumed to experience diminishing marginal returns, resulting in a decreasing marginal product of labor.
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                           DECREASING RETURNS TO SCALE: A given proportional change in all resources in the long run results in a proportional smaller change in production. Decreasing returns to scale exists if a firm increases ALL resources--labor, capital, and other inputs--by a given proportion (say 10 percent) and output increases by less than this proportion (that is, less than 10 percent). This is one of three returns to scale. The other two are increasing returns to scale and constant returns to scale. Decreasing returns to scale results if long-run production changes are less than the proportional changes in all inputs used by a firm.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. Decreasing 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 less 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. Decreasing returns to scale are the flip slide of diseconomies of scale. Whereas diseconomies of scale focus on changes in average cost, decreasing returns to scale focus on production. Diseconomies of scale indicate that long-run average cost increases, which corresponds to decreasing returns to scale in terms of output. Do not confuse decreasing returns to scale with decreasing marginal returns. While these phrases sound similar, they are quite different. Decreasing returns to scale relate to the long run in which all inputs are variable. Decreasing 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 decreasing 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.
Recommended Citation:DECREASING RETURNS TO SCALE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 27, 2022].
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Today, you are likely to spend a great deal of time visiting every yard sale in a 30-mile radius trying to buy either storage boxes for your computer software CDs or a set of tires. Be on the lookout for jovial bank tellers.
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A scripophilist is one who collects rare stock and bond certificates, usually from extinct companies.
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"It is very rare that you meet with obstacles in this world (that) the humblest man has not the faculties to surmount. " -- Henry David Thoreau, philosopher
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APR
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