Returns to scale

In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)

Short example: Where all inputs increase by a factor of 2, new values for output should be:

Twice the previous output given = a constant return to scale (CRTS)

Less than twice the previous output given = a decreased return to scale (DRS)

More than twice the previous output given = an increased return to scale (IRS)

Assuming that the factor costs are constant, a firm experiencing CRTS will have constant average costs, a firm experiencing DRS will have increasing average costs and a firm experiencing IRS will have decreasing average costs.

In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)

Short example: Where all inputs increase by a factor of 2, new values for output should be:

Twice the previous output given = a constant return to scale (CRTS)

Less than twice the previous output given = a decreased return to scale (DRS)

More than twice the previous output given = an increased return to scale (IRS)

Assuming that the factor costs are constant, a firm experiencing CRTS will have constant average costs, a firm experiencing DRS will have increasing average costs and a firm experiencing IRS will have decreasing average costs.