Creating Value

In the above figure product lines OA and OB indicate two hypothetical techniques of production and isoquants Q₁ (10units), Q₂ (20units) and Q₃ (30units) indicate three different levels of output. In the figure movement from point a to b indicates the doubling of both the inputs, from 1K+1L to 2K+2L. When inputs are doubled the outputs are also doubled, i.e. from 10units to 20units. Similarly, the movement from point b to c shows the increment in inputs from 2K+2L to 3K+3L, which is 50% increment. This 50% increment leads to the increment of output from 20units to 30units, which is also 50%. This kind of input output relationship exhibits the constants returns to scale.

REASONS OF CONSTANT RETURNS TO SCALE:

The constant returns to scale arise due to the limits of economies to scale. The producers are unable to efficiently manage the inputs with gradual increase in scale. After certain time period when economies of scale end and diseconomies are yet to begin, the returns to scale appear to be constant. Various communication and coordination, management (personnel, financial, marketing) problems increase with increase in input and output, which leads to diseconomies. Constant returns to scale are transitional stage between increasing and decreasing returns to scale.