Returns to Scale

Definition

Returns to scale refers to the change in output that occurs when all inputs are increased proportionally. If a firm experiences increasing returns to scale, doubling all inputs will result in more than double the output. If a firm experiences decreasing returns to scale, doubling all inputs will result in less than double the output.

Related terms

Economies of Scale: Economies of scale occur when an increase in production leads to lower average costs per unit. This means that as a firm produces more goods or services, it becomes more efficient and can reduce its costs.

Diseconomies of Scale: Diseconomies of scale occur when an increase in production leads to higher average costs per unit. This happens when a firm becomes too large and faces challenges such as coordination issues or inefficiencies.

Constant Returns to Scale: Constant returns to scale occur when an increase in production leads to proportional increases in average costs per unit. In other words, doubling all inputs results in exactly double the output and no change in average costs per unit.