Distinction between Laws of Returns and Returns to Scale
The laws of returns discussed above are often confused with ‘returns to scale’. The two may be clearly distinguished. By “returns to scale” is meant the behaviour of production or returns when all the productive factors are increased or decreased simultaneously in the same ratio. In other words, in returnsto scale. we analyse the effect of doubling. trebling, quadrupling and so on of all the inputs of productive
resources on the output of t he product. The returns 10 scale may clearly be distinguished from the Law of Variable Proportions. In the law of variable proportions. while some co-operating factors of production may be increased (or decreased). at least one factor (e.g., land in agriculture or entrepreneur in industry) remains constant or cannot be increased. so that the proportion among the factors of production changes and we see how returns or output is affected by such changes in the supply of the productive resources. In returns to scale. on the other hand. all the necessary factors of production are increased decreased to the same extent so that whatever the scale of production. the proportion among the factors remains the
Three Phases of Returns to Scale
A layman. uninitiated into the techniques of economic analysis, would perhaps expect that, with the doubling of all productive factors. the output would also double and with trebling of all factors of production. production would also be trebled. and so on. But actually this is not so. In other words. actually the output or returns do not increase/decrease strictly according t o the change in the scale.We know that in the case of the Law of V riable Proportions. as we increase some of tbe co-operating
factors, the marginal product o return increases at first, then stays constant and ultimately it starts diminishing. Similarly, when we increase the scale. i.e .•increase
all the factors of production together to the same extent, the marginal product or return increases a t first,up to a point. then constant for some further illcreasesin the scale of production is increased still further. The chief reason of this kind of behaviour is that when in the beginning, the scale of production is increased. increased division of labour possible and is adopted and, as a result thereof. output increases rather rapidly. In the above table, when there is unly one worker working oneacres of land, there is no scope for division uf labour. When there ale twu workers instead and SIX acres of land, i.c.. the factors or production me doubled. there will be increased scope for division of labour and output nut only doubles but increase stillmore and the returns to scale increase. In this way. up \0 3 certain point. the returns to scale will g(l on Increasing until there is no further scope for division of labour. Beyond this point. the marginal product or the returns to scale will cease to increase and will remain constant for certain furth erincreases in scale in the above table when 5 workers and 15 acres of land arc used instead of 4 workers and 12 acres of land. the marginal product remains 5 quintals as before: similarly for Serial No.5 to Serial No: 6). But when scale increased he) ond Serial No. ion of labour is reduced with the result that the marginal return or product begins to decline. In short, till’ mu in or utlu-rwise of the division.