Search results
Results from the WOW.Com Content Network
In other words, returns to scale analysis is a long-term theory because a company can only change the scale of production in the long run by changing factors of production, such as building new facilities, investing in new machinery, or improving technology.
Returns to scale can be Increasing returns to scale: doubling all input usages more than doubles output. Decreasing returns to scale: doubling all input usages less than doubles output. Constant returns to scale: doubling all input usages exactly doubles output.
Economies of scale is related to and can easily be confused with the theoretical economic notion of returns to scale. Where economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function.
If the coefficient is 1, then production is experiencing constant returns to scale. Note that returns to scale may change as the level of production changes. [2] A different usage of the term "output elasticity" is defined as the percentage change in output per one percent change in all the inputs. [3] The coefficient of output elasticity can ...
With increasing returns to scale, countries that are identical still have an incentive to trade with each other. Industries in specific countries concentrate on specific niche products, gaining economies of scale in those niches. Countries then trade these niche products to each other – each specializing in a particular industry or niche product.
Under constant returns to scale, doubling both capital and labor leads to a doubling of the output. Since outputs are increasing in both factors of production, doubling capital while holding labor constant leads to less than doubling of an output.
The concept of diminishing returns can be traced back to the concerns of early economists such as Johann Heinrich von Thünen, Jacques Turgot, Adam Smith, [12] James Steuart, Thomas Robert Malthus, and [13] David Ricardo. The law of diminishing returns can be traced back to the 18th century, in the work of Jacques Turgot.
Here the argument is that there are increasing returns to scale in manufacturing. These may be static—where the larger the size of the sector the lower the average costs—or dynamic via the induced effect that output growth has on capital accumulation and technical progress. Learning by doing effects are also likely to be important.