return to Scale

Returns to Scale" 

Here are the notes on "Returns to Scale" with all the points:

Returns to Scale

*Definition*

Returns to scale refer to the relationship between the increase in factors of production and the resulting increase in output.

*Types of Returns to Scale*

1. *Increasing Returns to Scale*: Output increases more than proportionally with increase in factors of production.

    - Causes: Technical and managerial indivisibilities, specialisation, dimensional efficiency.

2. *Constant Returns to Scale*: Output increases proportionally with increase in factors of production.

    - Condition: Factors of production are perfectly divisible.

3. *Decreasing Returns to Scale*: Output increases less than proportionally with increase in factors of production.

*Causes of Increasing Returns to Scale*

1. Technical and managerial indivisibilities

2. Specialisation

3. Dimensional efficiency

*Law of Constant Returns to Scale*

1. Output increases proportionally with increase in factors of production.

2. Factors of production are perfectly divisible.

*Law of Decreasing Returns to Scale*

1. Output increases less than proportionally with increase in factors of production.

2. Decreasing returns to scale ensure that the size of the productive firms cannot be infinitely large.

Economies of Scale

*Definition*

Economies of scale refer to the benefits that accrue to a firm due to its own expansion.

*Types of Economies of Scale*

1. *Internal Economies*: Benefits that accrue to a firm due to its own expansion.

    - Labour economies

    - Technical economies

    - Marketing economies

    - Managerial economies

    - Financial economies

    - Economies of survival

2. *External Economies*: Benefits that accrue to a firm due to the expansion of other firms.

*Internal Economies*

1. *Labour Economies*: Organising labour force by employing skilled and experienced labour.

2. *Technical Economies*: Adopting modern technology to increase output at a relatively low cost.

3. *Marketing Economies*: Producing in adequate quantity to confer bargaining power.

4. *Managerial Economies*: Managerial specialisation by establishing various departments.

5. *Financial Economies*: Generating required funds at a relatively cheap interest rate.

6. *Economies of Survival*: Spreading risks by diversifying activities.

Diseconomies of Scale

*Definition*

Diseconomies of scale refer to the negative effects on a firm's production due to its own expansion.

*Types of Diseconomies of Scale*

1. *Internal Diseconomies*: Negative effects on a firm's production due to its own expansion.

    - Limitations on availability of factors of production

    - Problems in management

    - Technical factors

2. *External Diseconomies*: Negative effects on other firms or the environment due to a firm's expansion.

*Example of External Diseconomies*

A fish processing factory discharging waste waters into an estuary or backwater, causing pollution and affecting nearby aquaculture.