Returns to Scale

4 Key excerpts on "Returns to Scale"

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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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  Profitability, Mechanization and Economies of Scale

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

    (Publisher)

  That is, we can determine empirically whether, and to what extent, a + b > 1, and this shows us whether and to what extent full increasing Returns to Scale applies to the data being considered. Such data is often available and statistical techniques of parameter estimation can readily be applied to determine the empirical value of e for any such data. 206 Profitability, Mechanization and Economies o fScale 7.10 Some common explanations for increasing Returns to Scale What are the reasons for increasing Returns to Scale? Returning to Figure 7.1 the reasons for increasing Returns to Scale are listed in the bottom left part of the diagram. The main reason for increasing Returns to Scale with regard to the input of fixed capital is the relationship between the quantity of output per period, Q, and the quantity of capital installed, K. This relationship is analyzed through the power rule (of which there are several variants). The power rule will be explained and discussed fully in the next chapter. The relationship between the quantity of output per period and the labour input per period, L, is more complex because mechanization tends also to become involved in the volume-cost relationship; this issue will be discussed in the chapter on mechanization and economies of scale. In this section we consider (very briefly) some other explanations for increasing Returns to Scale. These reasons may apply in the real world, but none is the main systematic reason for increasing Returns to Scale. One famous explanation for increasing Returns to Scale is that a large scale of output may permit or require the reorganization and specialization of work, and this leads to greater labour productivity in the large plant.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  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. Typically, the economies or diseconomies of scale mirror the Returns to Scale of the production function, increasing, constant and decreasing in the traditional cost theory or constantly decreasing in the modern theory. Returns to Scale are considered to be only the technical part of economies of scale. C H A P T E R 6 179 C H A P T E R 6 COSTS AND SCALE It should be noted, in passing, that the minimum point of the LAC at which the production function is often considered to switch from increasing to decreasing Returns to Scale is not strictly technically correct. It can be contended that the point of inflexion that signals the turning point is at the minimum of the LMC curve and this is to the left of the minimum point of the LAC . 6.4.1 Classification of economies of scale Economies of scale may be separated into those related to production per se and those that come from the effect of the scale of production on the factors external to the firm that affect internal costs. This second type is sometimes not considered internal economies of scale as internal economies are expected to take place ceteris paribus .

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  Essentials of Economics in Context

  • Neva Goodwin, Jonathan M. Harris, Pratistha Joshi Rajkarnikar, Brian Roach, Tim B. Thornton(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  Chapter 4 , on consumption) was the diminishing pleasure received by eating successive units of the same food. Suggest two other areas in life that exhibit diminishing marginal returns. Can you also think of some examples in your own life where there are constant or increasing Returns to Scale (i.e., you get the same, or more, psychic or other “returns” from each additional increment of something)?

  REVIEW QUESTIONS

  1. What is the “triple bottom line,” and how does it differ from the traditional economic assumption about the goal of production?
  2. What is the difference between fixed costs and variable costs?
  3. What is the difference between accounting costs and economic costs?
  4. Name all the categories that make up economic costs.
  5. What is the difference between private costs and external costs?
  6. What is a production function?
  7. What is a limiting factor in production?
  8. What distinguishes the short run from the long run?
  9. How can we express a production function graphically?
  10. What is marginal product?
  11. Describe the meaning of diminishing returns, constant returns, and increasing marginal returns, and explain how each might come about.
  12. Sketch a total product curve illustrating increasing returns, constant returns, and diminishing returns.
  13. Distinguish among fixed cost, variable cost, total cost, and marginal cost.
  14. Sketch a total cost curve illustrating fixed cost and decreasing, constant, and increasing marginal costs.
  15. What are average costs?
  16. What are economies of scale?
  17. Sketch a long-run average cost curve illustrating economies of scale, constant Returns to Scale, and diseconomies of scale.
  18. How do we define the efficient scale of production?

  EXERCISES

  1. Kai’s records show that last month, he spent $5,000 on rent for his shop, $3,000 on materials, $3,000 on wages and benefits for an employee, and $500 in interest on the loan that he used to start his business. He quit a job that had paid him $3,000 a month to devote himself full-time to this business. Suppose that he has to pay the lease on his shop and the interest on the loan regardless of whether he produces. However, suppose that at any time, he can change the amount of materials that he buys and the hours that his employee works and that he can also go back to his old job (perhaps part-time).
     1. What are the accounting costs of operating his shop for the month?
     2. What are the economic costs?
     3. Which types of costs of running his business for a month are fixed? Which are variable?

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