Returns to Scale
Definition
Returns to scale refers to the change in output that occurs when all inputs are increased proportionally. If a firm experiences increasing returns to scale, doubling all inputs will result in more than double the output. If a firm experiences decreasing returns to scale, doubling all inputs will result in less than double the output.
Analogy
Imagine you have a baking recipe that requires certain amounts of flour, sugar, and eggs. If you increase each ingredient by 50%, but your cake ends up being twice as big, then you're experiencing increasing returns to scale. However, if your cake only ends up being 1.5 times bigger, then you're experiencing decreasing returns to scale.
Related terms
Economies of Scale: Economies of scale occur when an increase in production leads to lower average costs per unit. This means that as a firm produces more goods or services, it becomes more efficient and can reduce its costs.
Diseconomies of Scale: Diseconomies of scale occur when an increase in production leads to higher average costs per unit. This happens when a firm becomes too large and faces challenges such as coordination issues or inefficiencies.
Constant Returns to Scale: Constant returns to scale occur when an increase in production leads to proportional increases in average costs per unit. In other words, doubling all inputs results in exactly double the output and no change in average costs per unit.
"Returns to Scale" appears in:
Study guides (1)
Additional resources (1)
Practice Questions (1)
Resources
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.