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SEVENTH RULE OF COMPLEXITY: The seventh of seven basic rules of the economy. It is the observation that the world is complex, that every action has direct and often intended consequences and indirect and probably unintended effects (that is, cause and effect). A few of the more noted illustrations of this seventh rule are the circular flow (especially the expenditure multiplier) and market failures (especially externalities).
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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.
Recommended Citation:INCREASING RETURNS TO SCALE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: February 21, 2020].
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ORANGE REBELOON
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Today, you are likely to spend a great deal of time wandering around the shopping mall trying to buy either decorative picture frames or storage boxes for your income tax returns. Be on the lookout for the last item on a shelf.
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Lewis Carroll, the author of Alice in Wonderland, was the pseudonym of Charles Dodgson, an accomplished mathematician and economist.
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"No man, for any considerable time, can wear one face to himself and another to the multitude without finally getting bewildered as to which may be true." -- Nathanial Hawthorne, Author
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WACM
Weak Axiom of Cost Minimization
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