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Returns to Scale in Long Run Production

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this revision video we look at the concept of long run returns to scale for businesses using examples from different industries.

Returns to Scale in Long Run Production

Long run production

  • In the long run, all factors of production are variable
  • How the output of a business responds to a change in factor inputs is called returns to scale
Numerical example of long run returns to scale
Units of CapitalUnits of LabourTotal Output% Change in Inputs% Change in OutputReturns to Scale
201503000
403007500100150Increasing
60450120005060Increasing
80600160003333Constant
100750180002513Decreasing


Consider the table above that shows added capital and labour inputs:

  • When we double the factor inputs from (150L + 20K) to (300L + 40K) the % change in output is 150% - increasing returns
  • When the scale of production is changed from (600L + 80K0 to (750L + 100K) then the percentage change in output (13%) is less than the change in inputs (25%) i.e. decreasing returns
  1. Increasing returns to scale occur when the % change in output > % change in inputs
  2. Decreasing returns to scale occur when the % change in output < % change in inputs
  3. Constant returns to scale occur when the % change in output = % change in inputs

The nature of the returns to scale affects the shape of a business’s average cost curve – when there are sizeable increasing returns to scale, and then we expect to see economies of scale from long run expansion.

Finding an optimal mix between labour and capital

  • In the long run businesses will be looking for an output that combines labour and capital in a way that maximises productivity and reduces unit costs towards their lowest level.
  • This may involve a process of capital-labour substitution where capital machinery and new technology replaces some of the labour input.
  • In many industries over the years we have seen a rise in the capital intensity of production - good examples include farming, banking and retailing.
  • Robotic technology is extensively used in many manufacturing / assembly industries such as cars. The image on the left is of a Ford car assembly factory in India.
  • Robotics does not always replace labour! For example, the car manufacturer Toyota has introduced over 100 manual-intensive workspaces across its factories so that younger workers can understand

Test your knowledge: Returns to Scale MCQ Revision Video

Returns to Scale - MCQ Revision Video

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