Returns to Scale
What is Returns to Scale?
Returns to scale describes how output responds when a firm scales all inputs up by the same proportion in the long run.
Returns to scale asks what happens to output when every input rises by the same factor. If doubling all inputs more than doubles output, the firm has increasing returns to scale; if output exactly doubles, returns are constant; if output less than doubles, returns are decreasing. This is strictly a long-run idea, because in the long run there are no fixed inputs and the firm can change plant size along with labor. Diminishing marginal returns is a different, short-run idea: at least one input (usually capital) is fixed and only the variable input rises, so each extra worker eventually adds less output. A firm can have increasing returns to scale in the long run and diminishing marginal returns in the short run at the same time.
Returns to Scale: a worked example
A plant uses 10 workers and 5 machines to make 200 units a day. Double both inputs to 20 workers and 10 machines. If output climbs to 500, that beats the doubled benchmark of 400, so the firm has increasing returns to scale; if it lands exactly on 400, returns are constant; if it reaches only 340, returns are decreasing. Now hold machines at 5 and raise labor alone from 10 to 20 workers: output might rise from 200 to just 260, which is diminishing marginal returns, not decreasing returns to scale, because capital never changed.
The mistake students make with returns to scale
The most common error is using diminishing returns and decreasing returns to scale as if they were the same thing. Diminishing marginal returns is short run and comes from adding more of ONE input to fixed inputs. Decreasing returns to scale is long run and comes from raising ALL inputs together and getting a less than proportional rise in output. Before you answer, check whether any input is being held fixed.
Returns to Scale questions
Is returns to scale a short-run or long-run concept?
Returns to scale is a long-run concept, because it requires changing every input at once, including plant and equipment. In the short run at least one input is fixed, so the firm cannot scale everything proportionally. That is why returns to scale and diminishing marginal returns are separate ideas.
What causes increasing returns to scale?
Increasing returns to scale usually come from specialization, indivisible equipment, and the geometry of larger machines and containers. A bigger operation lets workers specialize in narrower tasks and lets the firm run equipment that is only worth buying at high volume. These same forces produce economies of scale, the falling part of the long-run average cost curve.
How are returns to scale and economies of scale related?
Increasing returns to scale produce economies of scale when input prices are constant, because output grows faster than input use and average cost falls. Returns to scale is a statement about the production function in physical units; economies of scale is the matching statement about cost per unit. The two can come apart if buying more inputs changes their prices.
Formula / Example
This is the live Production Costs sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated