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January 19, 2022 

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LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is combined with a fixed input in short-run production, the marginal product of the variable input eventually declines. This is THE economic principle underlying the analysis of short-run production for a firm. Among a host of other things, it offers an explanation for the upward-sloping market supply curve. How does the law of diminishing marginal returns help us understand supply? The law of supply and the upward-sloping supply curve indicate that a firm needs to receive higher prices to produce and sell larger quantities. Why do they need higher prices?

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INCREASING RETURNS TO SCALE:

A given proportional change in all resources in the long run results in a proportional greater change in production. Increasing 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 more than this proportion (that is more than 10 percent). This is one of three returns to scale. The other two are decreasing returns to scale and constant returns to scale.
Increasing returns to scale results if long run production changes are greater 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. 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.

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INCREASING RETURNS TO SCALE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: January 19, 2022].


Check Out These Related Terms...

     | long-run production analysis | returns to scale | increasing returns to scale | constant returns to scale | long-run, microeconomics |


Or For A Little Background...

     | short-run production analysis | production inputs | production time periods | product | production | production cost | variables | labor | capital | law of supply | supply | principle | business | marginal analysis | factors of production | microeconomics |


And For Further Study...

     | total product | marginal product | average product | production function | price elasticity of supply | division of labor | production possibilities | law of increasing opportunity cost | law of diminishing marginal returns | marginal returns | production stages | very long-run, microeconomics |


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