In the long run, no factors are fixed. Law of return of scale refers to proportionate change in productivity from proportionate change in all the inputs.
Definition:
“The term law of return to scale refers to the changes in output as all factors change by the same proportion.” Koutsoyiannis
Types of return of scale
- Increasing return of scale
When proportionate increase in factors of production leads to higher proportionate increase in production refers to increasing return of scale.
In the below figure, x axis represents the increase in labour and capital while the Y axis represents increase in output. When labour and capital increases from Q to Q1, output also increases from P to P1 which is higher than the change in factors of production ie labour and capital.
2. Diminishing return of scale
Diminishing return refers to percentage increase in factors of proportion leads to smaller proportion increase in the output.
In the below diagram, x axis refers to an increase in labour and capital while the Y axis refers to an increase in output. Percentage increase in labour and capital from Q to Q1 results in less percentage change in output from P to P1.
3. Constant return of scale
Constant return of scale refers to output increases in the same proportion in which factors of production (labour and capital) increases. Internal and external economies is equal to internal and external diseconomies.
In the below figure, x axis refers to an increase in labour and capital while the Y axis refers to an increase in output. Increase in labour and capital from Q to Q1 is equal to the increases in output from P To P1.
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