The quantitative change in the output of a firm or industry resulting from a proportionate increase in all inputs. If the quantity of output rises by a greater proportion e.g. if output increases by 2.5 times in response to a doubling of all inputs-the production process are said to exhibit increasing returns to scale. Such economies of scale may occur because greater efficiency is obtained as the firm moves from small to large-scale operations.
The short-run is defined in economics as a period of time where at least one factor of production is assumed to be in fixed supply i.e., it cannot be changed. We normally assume that the quantity of capital inputs (e g., plant and machinery) is fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labour, components, raw materials and energy inputs. Often the amount of land available for production is also fixed. The time periods used in textbook economics are somewhat arbitrary because they differ from industry to industry. The short-run for the electricity generation industry or the telecommunications sector varies from that appropriate for newspaper and magazine publishing and small-scale production of foodstuffs and beverages. Much depends on the time scale that permits a business to alter all of the inputs that it can bring to production.
Long-run production – returns to scale: In the long run, all factors of production are variable. How the output of a business responds to a change in factor inputs is called return to scale.
Increasing returns to scale occur when the % change in output > % change in inputs. Decreasing returns to scale occur when the % change in output < % change in inputs.
