Constant Returns to Scale
Constant Returns to Scale refers to a production situation where increasing all inputs by a certain proportion results in a proportional increase in output. In other words, if inputs are doubled, output also doubles. This concept is important in understanding the relationship between input and output levels in the production process.
5 Key excerpts on "Constant Returns to Scale"
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...In a homogeneous production function such as the one depicted in Figure 5.6, the returns to scale are measured by the distance between successive isoquants. The typical production function first exhibits increasing, then constant and then decreasing returns to scale, in that order. Similar to the Law of Variable Proportions, which characterizes the short-run production function, the Laws of Returns to Scale characterizes the long-run production function. With increasing returns to scale, the isoquants along the expansion path (isocline) get increasingly closer together. This is because an increase of output by a certain proportion requires less than a proportionate increase in the factor inputs. So, for example, consider that, initially, the production of one unit of output (Q) requires three unit of capital and two units of labour. With increasing returns to scale, the production of two units of output would require proportionately less of these inputs (i.e. less than twice the amount of these inputs). So, instead of requiring six units of capital and four units of labour, the production of two units of output would require, say, four units of capital and three units of labour. For decreasing returns to scale the converse would hold as the isoquants get further apart from each other. Continuing with the example from above, the production of two units of production would require more than twice the amount of the inputs required for one unit of production. Hence, instead of requiring six units of capital and four units of labour, the production of two units of output would require, say, eight units of capital and five units of labour. The case of Constant Returns to Scale is that where a proportionate increase in output requires the same proportionate increase in inputs. Successive isoquants are equidistant from each other. This is similar to the case of the strict Cobb–Douglas production function...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...Nearly one third of the US corn crop is exported to other nations, including Japan, Mexico, Korea, Taiwan, and Egypt. Source: Iowa Corn, http://www.iowacorn.org/ 2.3.1 Constant, increasing, decreasing, and negative returns The level of inputs as reported in the production function determines the level of output (the production function describes the physical relationship between inputs and output). The production process can take on different forms: Constant Returns, Increasing Returns, Decreasing Returns, and Negative Returns. The word “returns” refers to increases in output that occur as quantities of inputs increase incrementally. Think of increasing the level of inputs by one unit at a time, and measuring how output responds to each change. This incremental way of approaching a problem is one cornerstone of “thinking like an economist.” In a production process characterized by Constant Returns, each additional unit of input is as productive as all other units of input. Constant Returns = when each additional unit of input added to the production process yields a constant level of output relative to the previous unit of input. Output increases at a constant rate. Consider the number of cattle it takes to produce cattle hides: one animal produces one hide, no more, no less (Figure 2.4). Since each additional unit of input (in this case steers) produces exactly one additional hide, the slope of the production function for leather hides (= ΔY/ΔX) remains constant as more inputs are used, graphically demonstrating the concept of constant returns. Figure 2.4 Leather production: constant returns Increasing Returns = when each additional unit of input added to the production process yields a larger additional amount of output relative to the previous unit of input. Output increases at an increasing rate. Managers of business firms look favorably upon this type of production process, since each additional unit of input is more productive than the one just before it...
eBook - ePub- Stanley Bober(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Suppose and with similar reasoning we would find an excess labor supply of 4 units, with the limit of output being determined by the smaller ratio (). This gives an explanation of the min term in the production function in Equation 2.8. We are considering the matter of the prevailing type of production function on a micro level of an organization operating one or more plants of different vintages. Let us think in terms of a single plant embodying a capital stock of a particular technology that is being utilized to produce the 4 units of output. Based on our input coefficient values, this means, as we said, the employment of 8 units of capital and 16 units of labor. A decision to increase production by 50 percent would require an increase in employment of both capital and labor by 50 percent. We are relating a constant returns-to-scale situation whereby if all inputs are increased by α percent, output increases by α percent as well; by returns to scale we mean the effect on output of an equal proportionate change in all inputs. Perhaps it would be easier to think of the change in all inputs as bringing into a production mode an additional quantity of the capital stock with the associated required labor units. The variable costs would involve the additional labor content plus the material and running costs related to the additional capital usage, where these costs relate to the technology built into the capital stock itself. And these costs would change in proportion to the change in output levels. Now what does this type of production process mean for our cost-curve construction? Surely that average variable costs, and hence marginal costs, will remain essentially constant over a wide range of production levels up to full capacity operation of the plant. And we may assume that the plant maintains a level of overhead or fixed costs associated with its operation in addition to its direct labor and material costs...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Output increases at a constant rate. Consider the number of cattle it takes to produce cattle hides: one animal produces one hide, no more, no less (Figure 2.4). Since each additional unit of input (in this case steers) produces exactly one additional hide, the slope of the production function for leather hides (=ΔY/ΔX) remains constant as more inputs are used, graphically demonstrating the concept of constant returns. • Increasing Returns = when each additional unit of input added to the production process yields a larger additional amount of output relative to the previous unit of input. Output increases at an increasing rate. Managers of business firms look favorably upon this type of production process, since each additional unit of input is more productive than the one just before it. For example, if only one person tries to run both the combine and the truck during wheat harvest, the production process is inefficient. When a second worker drives the truck, the first person can spend all of her time operating the combine. As more workers join the harvest crew, holding all other inputs constant, the output increases at an increasing rate, as depicted in Figure 2.5. When increasing returns are present, each additional unit of input causes the level of output to increase more, relative to the previous unit of input. Figure 2.4 Leather production: constant returns Figure 2.5 Wheat production: increasing returns QUICK QUIZ 2.10 The production functions depicted in Figures 2.4 and 2.5 show an upward slope. Which of the graphs demonstrates increasing returns? How did you arrive at this conclusion? Decreasing returns occur when the addition of one more unit of input results in a smaller increase in output than the previous unit. • Decreasing Returns = when each additional unit of input added to the production process yields less additional output relative to the previous unit of input...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Economies of scale and diseconomies of scale account for the U-shaped appearance of this cost curve. In discussing the general shapes of a firm’s cost curves in the short and long run, we assume that technology, resource prices, and taxes remain constant as the firm changes its level of output. Changes in any of these factors will cause a firm’s cost curves to shift upward or downward. Economists define the total costs of production as the sum of explicit costs and implicit costs. According to accounting principles, profit equals total revenue minus explicit costs. Besides caring about explicit costs, economists are interested in a firm’s implicit costs. Economic profit thus equals total revenue minus the sum of explicit costs and implicit costs. A firm that makes zero economic profit is said to earn a normal profit. It represents the minimum profit necessary to keep a firm in operation. In other words, the firm earns just enough revenue to cover its explicit costs and implicit costs. Key Terms and Concepts short run (77) fixed input (77) variable inputs (77) long run (77) production (78) production function (78) total product (79) marginal product (79) law of diminishing marginal returns (79) increasing marginal returns (79) diminishing marginal returns (79) total fixed cost (82) total variable cost (83) total cost (84) average fixed cost (84) average variable cost (84) average total cost (84) marginal cost (86) long-run average total cost curve (87) economies of scale (87) diseconomies of scale (90) Constant Returns to Scale (90) explicit cost (93) implicit cost (93) profit (94) losses (94) accounting profit (94) economic profit (94) normal profit (94) Study Questions and Problems Table 4.6 Productivity Data Quantity of Labor Total Product Marginal. Product 0 0 1 20 2 45 3 65 4 80 5 90 As the manager of a restaurant, you estimate the total product of labor used to cook meals, as shown in Table 4.6...
