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The main reason for the increasing returns to scale is the increase in production efficiency due to the expansion of the firm's production scale. A firm's production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing ...
A family of isoquants can be represented by an isoquant map, a graph combining a number of isoquants, each representing a different quantity of output.An isoquant map can indicate decreasing or increasing returns to scale based on increasing or decreasing distances between the isoquant pairs of fixed output increment, as output increases. [7]
For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels.
New trade theorists relaxed the assumption of constant returns to scale, and showed that increasing returns can drive trade flows between similar countries, without differences in productivity or factor endowments. With increasing returns to scale, countries that are identical still have an incentive to trade with each other.
The presence of increasing returns means that a one percent increase in the usage levels of all inputs would result in a greater than one percent increase in output; the presence of decreasing returns means that it would result in a less than one percent increase in output. Constant returns to scale is the in-between case.
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 ...
For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels.
For example, if both capital and labor inputs are doubled, output of the commodities is doubled. In other terms the production function of both commodities is "homogeneous of degree 1". The assumption of constant returns to scale CRS is useful because it exhibits a diminishing returns in a factor.