205:, a firm experiencing decreasing returns will have increasing long-run average costs, and a firm experiencing increasing returns will have decreasing long-run average costs. However, this relationship breaks down if the firm does not face perfectly competitive factor markets (i.e., in this context, the price one pays for a good does depend on the amount purchased). For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.
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A firm's production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at some range of output levels between
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In the long run, all factors of production are variable and subject to change in response to a given increase in production scale. In other words, returns to scale analysis is a long-term theory because a company can only change the scale of production in the long run by changing factors of
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In mainstream microeconomics, the returns to scale faced by a firm are purely technologically imposed and are not influenced by economic decisions or by market conditions (i.e., conclusions about returns to scale are derived from the specific mathematical structure of the production function
162:(IRS). For example, when inputs (labor and capital) increase by 100%, the increase in output is greater than 100%. The main reason for the increasing returns to scale is the increase in production efficiency due to the expansion of the firm's production scale.
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In a more general set-up, for a multi-input-multi-output production processes, one may assume technology can be represented via some technology set, call it
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Assuming that the factor costs are constant (that is, that the firm is a perfect competitor in all input markets) and the production function is
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Zelenyuk, Valentin (2013). "A scale elasticity measure for directional distance function and its dual: Theory and DEA estimation".
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Färe, R., and D. Primont (1995) Multi-Output
Production and Duality: Theory and Applications. Kluwer Academic Publishers, Boston.
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129:. It explains the long-run linkage of increase in output (production) relative to associated increases in the inputs (
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Gelles, Gregory M.; Mitchell, Douglas W. (1996). "Returns to scale and economies of scale: Further observations".
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Shephard, R.W. (1970) Theory of cost and production functions. Princeton, NJ: Princeton
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Zelenyuk V. (2014) "Scale efficiency and homotheticity: equivalence of primal and dual measures",
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Shephard, R.W. (1953) Cost and production functions. Princeton, NJ: Princeton
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Hartigh, Erik, Fred Langerak (2001). "Managing increasing returns".
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Twice the previous output if there are constant returns to scale (CRS)
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Vassilakis (1987). "Increasing returns to scale",
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are factors of production—capital and labor, respectively.
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The elasticity of scale and the shape of average costs
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1333:The New Palgrave: A Dictionary of Economics
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1439:Suranovic, Steven M. (February 15, 2007).
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1330:John Eatwell (1987). "Returns to scale",
642:production function has its general form
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1396:European Journal of Operational Research
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1308:The New Palgrave Dictionary of Economics
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1121:(4): 370-378.
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60: –
59:
55:
54:Find sources:
48:
44:
38:
37:
32:This article
30:
26:
21:
20:
2053:Optimization
2038:Mathematical
1998:Experimental
1993:Evolutionary
1978:Econometrics
1850:
1836:Public goods
1810:Price system
1805:Price signal
1719:Monopolistic
1588:Distribution
1503:Major topics
1457:
1444:
1416:
1399:
1395:
1387:
1380:
1373:91, 481-493.
1370:
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1306:
1283:(1): 15–24.
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640:Cobb–Douglas
637:
513:
508:
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429:
355:
351:of degree 1.
256:
212:
196:
182:
173:in isolation
172:
169:
165:
159:
152:
145:
139:
135:
120:
105:
96:
86:
79:
72:
65:
53:
41:Please help
36:verification
33:
2003:Game theory
1968:Development
1915:Uncertainty
1795:Price floor
1775:Preferences
1714:Competition
1684:Information
1647:Externality
1630:Equilibrium
1571:Transaction
1549:Opportunity
1510:Aggregation
1094:Moore's law
349:homogeneous
2033:Managerial
1953:Behavioral
1826:Production
1763:Oligopsony
1603:Elasticity
1515:Budget set
1100:References
199:homothetic
69:newspapers
2074:Economics
1946:Subfields
1841:Rationing
1758:Oligopoly
1753:Monopsony
1741:Bilateral
1674:Household
1525:Convexity
1313:Abstract.
1001:and, for
586:∀
123:economics
99:July 2016
2136:Category
2121:Category
2067:See also
1958:Business
1930:Marginal
1925:Expected
1866:Shortage
1861:Scarcity
1736:Monopoly
1642:Exchange
1554:Implicit
1544:Marginal
1033:See also
1029:< 1.
2079:Applied
2058:Welfare
1920:Utility
1880:Surplus
1819:Pricing
1731:Duopoly
1724:Perfect
1667:Service
1635:General
1539:Average
1458:YouTube
1156:1183297
638:If the
179:Example
83:scholar
1904:Supply
1895:Demand
1831:Profit
1699:Market
1561:Social
1326:links.
1196:
1154:
790:
653:
615:
568:
545:
522:
503:where
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366:
267:
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2023:Labor
2008:Green
1780:Price
1662:Goods
1652:Firms
1152:JSTOR
779:then
712:with
90:JSTOR
76:books
1937:Wage
1846:Rent
1814:Free
1566:Sunk
1534:Cost
1527:and
1194:ISBN
1057:and
761:<
755:<
744:and
729:<
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507:and
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62:news
2028:Law
1422:doi
1404:doi
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