Returns to scale:
As stated earlier, all the factor inputs become variable in the long run and thereby no distinction can be made between fixed inputs and variable inputs.
Return to scale is associated with long run production function. Returns to scale refers to the change in output when all inputs are variable and the proportion between inputs remains constant.
When all the inputs vary in the same proportion, the output (TP) behaves in different manner, which can be clubbed into three categories.
1. Increasing Returns to Scale (IRS):
When a proportionate change in all the inputs leads to more than proportionate change in output, it is known as the stage of increasing returns to scale. For instance, a 10 percentage change in inputs results in more than 10 percentage change in output.
2. Constant Returns to Scale (CRS):
When a proportionate change in all the inputs leads to change in output in the same proportion is known as the stage of constant returns to scale. It indicates that a 10 percentage change in inputs leads to exactly 10 percentage change in output.
3. Decreasing Returns to Scale (DRS):
When a proportionate change in all the inputs leads to less than proportionate change in output is known as the stage of decreasing returns to scale. It indicates that a 10 percentage change in inputs leads to less than 10 percentage change in output.
