All the inputs used in production of a good are increased simultaneously and in the same proportion. What are its possible effects on Total Product? Explain with the help of a numerical example.
All the inputs used in production of a good are increased simultaneously and in the same proportion. What are its possible effects on Total Product? Explain with the help of a numerical example.
All the inputs used in production of a good are increased simultaneously and in the same proportion. What are its possible effects on Total Product? Explain with the help of a numerical example.
The behaviour of total output in the long run time period is technically termed as Returns to Scale.
There are three possibilities: 1. Increasing Returns to Scale (IRS) :- It occurs when a given proportionate increase in all factor inputs (in some constant ratio) causes proportionately greater increase in output. For example: Suppose there are only two inputs, labour (L) and Capital (K). Suppose 1K + IL produce 100 units and 2K + 2Lproduce 250 units. Input rises by 100% while the output rises by 150%. 2. Constant Returns to Scale (CRS) :- It occurs when a given proportionate increase in all factor inputs causes proportionately equal increase in output. At this stage, economies of scale are counter balanced by diseconomies of scale. For example, suppose 1K+1L produce 100 units and 2K+2L produce 200 units, both inputs and TP rise in the same proportion. 3. Diminishing Returns to Scale (DRS) :- It occurs when a given proportionate increase in all factor inputs causes proportionately lesser increase in output. For example, Suppose 1K+1L produce 100 units and 2K+2L produce 190 units, inputs rise by 100% while the output rise by 90%.
All the inputs used in production of a good are increased simultaneously and in the same proportion. What are its possible effects on Total Product? Explain with the help of a numerical example.
Answers
MR.SHANKAR
The behaviour of total output in the long run time period is technically termed as Returns to Scale.
There are three possibilities:
1. Increasing Returns to Scale (IRS) :- It occurs when a given proportionate increase in all factor inputs (in some constant ratio) causes proportionately greater increase in output.
For example: Suppose there are only two inputs, labour (L) and Capital (K). Suppose 1K + IL produce 100 units and 2K + 2Lproduce 250 units. Input rises by 100% while the output rises by 150%.
2. Constant Returns to Scale (CRS) :- It occurs when a given proportionate increase in all factor inputs causes proportionately equal increase in output. At this stage, economies of scale are counter balanced by diseconomies of scale. For example, suppose 1K+1L produce 100 units and 2K+2L produce 200 units, both inputs and TP rise in the same proportion.
3. Diminishing Returns to Scale (DRS) :- It occurs when a given proportionate increase in all factor inputs causes proportionately lesser increase in output.
For example, Suppose 1K+1L produce 100 units and 2K+2L produce 190 units, inputs rise by 100% while the output rise by 90%.