DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH

Name : P. Sankara Rao

Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Polytechnic, Srikakulam
Subject : Business Economics
Subject code : CCP 502
Topic : Laws of Production
Duration : 50 mts.
Sub Topic : Law of Returns to Scale
Teaching aids : PPT & Animation

CCP 502.44 1
Objectives
On completion of this period you would be
able to :
 Know the concept of “Returns to Scale”
 Identify how they arise?
 Grasp the distinction between law of variable
proportions & law of returns to scale

CCP 502.44 2
Recap

In the previous class, we have learnt

 The applications of law of diminishing returns
 The classical approach of the law

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Known to unknown

 What do you mean returns of scale?

 How many stages are there in the law of returns
to scale?
 Is there any difference between law of variable
proportions and law of returns to scale?

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Introduction

 The law of returns to scale describes the

relationship between outputs and inputs in the
long run when all inputs are increased.
 To meet a long run change in demand the firm
increases its scale of production by using more
space, more machines and labourers in the
factory.

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Law of Variable Proportion
Vs
Law of Returns To Scale

 The law of variable proportion states the effect on

production
 When one factor of production is kept constant
while other factors are increased in a combination
of factors
 But the Law of Returns to scale refers to the effect
on production when all the factors of production
are increased

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Law of Variable Proportion
Vs
Law of Returns To Scale

 Law of variable proportion applies to the short

run period
 Law of returns to scale applies to the long run
period

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Law of Returns To Scale-assumptions

The law of returns to scale assumes that:

 All factors (inputs) are variable but enterprise is
fixed
 All inputs are homogeneous
 Technology remains constant
 There is perfect competition

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Stages

 Based on the above assumptions, when a firm

in a long run increases all the above factor
inputs, the effect on output shows the following
stages:
 First stage - increasing returns
 Second stage - constant returns
 Third stage - decreasing returns

CCP 502.44 9
First stage - increasing returns

 In the long run as more and more of factor

inputs are employed, initially the output will
increase more than proportionately to the
increase in the input

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Second stage – Constant stage

 Then, the output will increase in the same

proportion as the input employed.

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Third stage

 Finally the output will increase less than

proportionately to the input employed.

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Summary

In this session we have learnt

 Concepts of returns to scale
 Identifying how they arise
 Distinction between law of variable proportion
and law of returns to scale

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Frequently asked questions

1. Give any two differences between law of

variable proportion and law of returns to scale
2. What are the stages of returns to scale ?

CCP 502.44 14