Search results
Results from the WOW.Com Content Network
If output increases by more than the proportional change in all inputs, there are increasing returns to scale (IRS). For example, when inputs (labor and capital) increase by 100%, the increase in output is greater than 100%. The main reason for the increasing returns to scale is the increase in production efficiency due to the expansion of the ...
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.
There are three common ways to incorporate technology (or the efficiency with which factors of production are used) into a production function (here A is a scale factor, F is a production function, and Y is the amount of physical output produced): Hicks-neutral technology, or "factor augmenting": = (,)
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.
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]
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 engine for growth can be as simple as a constant return to scale production function (the AK model) or more complicated set ups with spillover effects (spillovers are positive externalities, benefits that are attributed to costs from other firms), increasing numbers of goods, increasing qualities, etc. [citation needed]
An example would be a factory increasing its saleable product, but also increasing its CO 2 production, for the same input increase. [2] The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory. [5]