A level biology question bank. A Level Biology Multiple Choice Questions and Answers (MCQs) by Arshad Iqbal · OverDrive: ebooks, audiobooks, and more for libraries and schools 2023-01-06

Returns to scale refer to the changes in output that result from a change in the scale of production, where the scale of production refers to the amount of inputs used in the production process. When a firm increases its scale of production, it may experience either increasing, decreasing, or constant returns to scale.

Increasing returns to scale occur when a firm's output increases by a larger percentage than the percentage increase in inputs. For example, if a firm doubles its inputs and its output increases by more than 100%, it is experiencing increasing returns to scale. This may occur due to technological changes or economies of scale, which are cost advantages that arise from producing at a larger scale.

On the other hand, decreasing returns to scale occur when a firm's output increases by a smaller percentage than the percentage increase in inputs. For example, if a firm doubles its inputs and its output increases by less than 100%, it is experiencing decreasing returns to scale. This may occur due to diseconomies of scale, which are cost disadvantages that arise from producing at a larger scale.

Constant returns to scale occur when a firm's output increases by the same percentage as the percentage increase in inputs. For example, if a firm doubles its inputs and its output also doubles, it is experiencing constant returns to scale.

Returns to scale have important implications for firms' production and cost decisions. For example, a firm experiencing increasing returns to scale may have an incentive to increase its scale of production, as it will be able to produce more output at a lower cost per unit. On the other hand, a firm experiencing decreasing returns to scale may have an incentive to decrease its scale of production in order to reduce its costs. Understanding returns to scale is therefore important for firms as they make decisions about how much to produce and at what cost.