Increasing Returns to Scale

6 Key excerpts on "Increasing Returns to Scale"

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  Profitability, Mechanization and Economies of Scale

  • Dudley Jackson(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  This reason is generally confined to factor inputs, but the reason can extend to non-factor inputs such as energy (however, we shall consider only factor inputs). This reason for economies of scale is usually known as ‘increasing Econom ies o f Scale in Theory 181 returns to scale’ or ‘physical economies of scale’ meaning that the favourable cost—volume relationship arises for a reason relating to physical quantities of inputs and technically connected with the conditions of production itself. We shall mostly use the standard term ‘Increasing Returns to Scale’. Increasing Returns to Scale occurs where at least one unit input requirement decreases with, and because of, the increase in the quantity o f output per period o f a single type ofproduct. This book is concerned with Increasing Returns to Scale, because Increasing Returns to Scale relates to the physical and technical conditions of production in a plant, and so is an integral part of production economics. Moreover, Increasing Returns to Scale is a pervasive and very important feature of real- world production economics (for reasons which will become obvious in the following three chapters). For the sake of explaining the concept of economies of scope (which we are not going to discuss further), we used the distinction between an establishment and a plant, but the remainder of this chapter reverts to a discussion in terms of plants only, because in any comparison we are henceforth going to be concerned with the production of one, and only one, type of product by the plant. 7.5 Full Increasing Returns to Scale This chapter is concerned with what I call ‘full Increasing Returns to Scale’, which occurs when Increasing Returns to Scale simultaneously affects both of the factor inputs of labour and capital so that each of unit labour requirement and unit capital requirement decreases with an increase in the scale of production per period.

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  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  The curve is upward-sloping, because more labor produces more output. The curve gets flatter and flatter because of the law of diminishing returns: the increases in output get smaller and smaller as more and more labor is used. Economies of Scale Diminishing marginal returns occur when only one input is increased and, importantly, all other inputs are held constant. But what happens if all inputs are increased at once? Double all the inputs—twice as much labor, capital, and natural resources—and does output double? Does it more than double? Does it increase, but not to the point of doubling? When all inputs are doubled and as a result there is twice as much output—double the inputs produces double the output — economists say the economy exhibits constant returns to scale. The inputs are the scale of production. When there are constant returns to scale, the return to increasing the scale is 1: double the inputs produces double the output; 1.7 times the inputs produces 1.7 times the output. When all inputs are doubled and as a result there is more than twice as much output—double the inputs produces more than double the output—economists say the economy exhibits economies of scale or Increasing Returns to Scale. When 78 Chapter 5 Long-Run Economic Growth there are economies of scale, the return to increasing the scale of production is more than 1: double the inputs produces more than double the output; 1.7 times the inputs produces more than 1.7 times the output. When all inputs are doubled and as a result there is less than twice as much output—double the inputs produces less than double the output—economists say the economy exhibits diseconomies of scale or decreasing returns to scale. When there are diseconomies of scale, the return to increasing the scale of production is less than 1: double the inputs produces less than double the output; 1.7 times the inputs produces less than 1.7 times the output.

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  A Reconsideration of the Theory of Non-Linear Scale Effects

  The Sources of Varying Returns to, and Economies of, Scale

  • Richard G. Lipsey(Author)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  As we will see later in this Element, when authors discuss the sources of favourable scale effects, such as more efficient capital or greater division of labour, they disagree in almost all cases as to whether the source causes an IRTS or an EoS. This should not surprise us in the light of our arguments both that the standard definition of returns to scale is deficient and that production actually takes place in multiple stages. Indeed, it is not obvious that there is any gain in distinguishing between these two concepts. However, if we wish to do so, the following definitions may suffice: returns to scale occur when there is a change in a firm’ s unit cost of production that would have occurred if all input prices had remained constant, while economies or diseconomies of scale occur if there are changes in a firm’ s unit cost including those that would not have occurred if input prices had remained constant. Thus, returns to scale are located in the relation between a firm’ s inputs and its output and these give rise to economies of scale which can also arise from sources such as input price changes due to changes in market power or upstream scale effects. For the rest of this study we use the type-1 definition where each different technique of production has its own PF, each one of which may differ from the others in the nature of inputs and the marginal rates of substitution among them at various scales of output. Those who wish to continue with the type-2 PF definition can think of returns to scale when we speak of efficiencies of design as defined below. Further Problems with the PF We note in passing that there are other serious problems connected with both of the definitions of a PF. To see these, consider the concept of technical effi- ciency, an engineering concept.

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  Innovation, Technology and Hypercompetition

  Review and Synthesis

  • Hans-Werner Gottinger(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Chapter 11 ). At this stage we are most concerned about the catalytic role of technological competition in increasing returns industries. Increasing returns industries are nowadays most likely to be identified with high-technology industries, in particular with information, communication and health care-related industries (Gottinger, 2003).

  For those industries Shapiro and Varian (1999) have recently suggested a combination of supply-side and demand-side scale economies to explain the intrinsic aspects of technological competition. It appears, however, that this way of seeing technological competition is too simple to capture the variety and complexity of real-world businesses in those industries Thus we suggest a general framework to describe technological competition in what we are going to call the increasing returns economy .

  Section 10.2 identifies supply-side scale economies as a major ingredient of increasing returns economies. Section 10.3 lists increasing returns properties as part of a Schumpeterian mechanism. The relationship of increasing returns and non-ergodic markets is explored in Section 10.4. Section 10.5 explores technological competitive paths subject to uncertainty of technological outcomes, whereas Section 10.6 focuses on technological competition under standard setting. Section 10.7 relates the intensity of technological competition to network externalities, and Section 10.8 provides a summary of increasing returns factors in competitive settings. Finally, Section 10.9 draws conclusions on the systemic connection of increasing returns and technological competition.

  10.2 Supply-side scale economies

  A first source of increasing returns assuming constant technology identifies a concentrated industry structure as a result of supply-side scale economies. In many cases large firms are more efficient than smaller companies because of their scale: larger corporations tend to have lower unit costs. This efficiency in turn fuels further growth. However, positive feedbacks based on supply-side economies of scale usually run into natural limits. Past a certain size companies find growth difficult owing to the increasing complexity of managing a large organizational structure. From then on, negative feedback takes over. As traditional supply-side economies of scale generally become exhausted at a scale well below total market dominance, large firms, burdened with high costs, never grow to take the entire market and smaller, more nimble firms can find profitable niches. Shapiro and Varian (1999) conclude that because of this most industrial markets are oligopolies rather than monopolies.

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  Perfect Competition and the Transformation of Economics

  • Frank Machovec(Author)
  • 1995(Publication Date)
  • Taylor & Francis

    (Publisher)

  A review of Figures 2 and 3 will hopefully clarify the Marshallian perspective upon which we have been elabourating in this section. Economies of scale along the average cost curve (declining cost per unit) occur whenever a firm is expanding along the increasing returns portion of its production function. In Figure 9.1, for example, consider function f1, which is homothetic and quasiconcave. Along cross-section OC, it exhibits Increasing Returns to Scale only from O to P, then decreasing returns from P onward. Returns to scale are constant at inflection point P, which lies on a locus of constant-returns points on the production surface, a portion of which, PN, is illustrated. This locus of constant-returns input combinations can be projected onto the (L, K) plane as isoquant Q2 in Figure 9.2, where the cost-minimizing combination of inputs will be 100 machines and 200 workers.

  Similarly, isoquant Q1 represents the locus of points whose height is 1000 output units, (GE in Figure 9.1), while Q3 represents 4000—all projected from production surface f1. Firms facing infinitely elastic demands will seek to acquire operating funds sufficient to purchase 100 machines and 200 workers, so as to capture all the economies of scale between zero units and 3000 units, where unit cost is momentarily minimized. Beyond Q2=3000 in Figure 9.2 (i.e., beyond point P on f1 in Figure 9.1), decreasing returns to scale on the production surface will cause diseconomies along the average cost curve (i.e., rising unit cost for an output exceeding 3000). These diseconomies are reflected in Figure 9.2 as the disproportionately higher capital and labour outlays required to move north-eastward from P along ray OR. For example, input usage would have to rise 50 per cent to boost output 33 per cent (from 3000 at P to 4000 at T). Of course, we are assuming that input supplies are perfectly elastic, so ΔPL/ΔQ=PK/ΔQ=0. Also, if demand is insufficient to sell 3000 units, the firm will produce along the downward sloping portion of its average cost curve.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  As a corollary, it also suggests, however, that once a producer can attain the minimum optimum scale, producers operating at much larger scales would have little if any cost advantage. The signal to producers fearing competition in a newly opened market, for example, is to seek to identify the minimum optimal scale for their industry and attempt to reach this level of output in order to meet any competitive challenges. This assumes that the firms are all using the same technology (managerial, production, etc.) meaning that they are essentially using the same production function.

  6.4 Economies of Scale

  The concept of economies of scale is a long-run phenomenon. These economies of scale are internal to the firm and may arise from increasing the number of plants (plant replication) as well as from increasing plant size. They may also derive from expanding the plant with the same product or by diversifying into other products. Diseconomies of scale must be considered as well.

  Internal economies and diseconomies of scale should be distinguished from external economies and diseconomies. Whereas internal economies determine the shape of the long-run average cost curve, external economies cause shifts in the position of the long-run average cost curve. External economies and diseconomies are exogenous factors generally outside of the producer’s control, such as the cost of inputs.

  Economies and diseconomies of scale should also be distinguished from economies and diseconomies of scope although there are some interrelationships. Typically, economies of scale are considered to be related to the supply or production side while economies of scope are related to the demand or marketing side and particularly to the bundling of goods for sale. However, in some cases, the promotional or marketing activities are included in the consideration of economies of scale in production. These can be seen as part of the administrative or managerial techniques which are part of the production function.

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