Creating Value

In the long run, expansion of output can be achieved by varying all factors. In long run all the factors variable and we can increase the output by varying the single factor of production or all factors of production. All factors can be varied by the same proportion or by varying proportions. Long run production behaviour is explained with the help of the laws of returns to scale. It is a long term phenomenon. In long run both the inputs (labour and capital) are variable and their quantity is changed proportionately and simultaneously, which eventually changes the scale of production (size of the firm). And the laws that pertain to these input-output relationships under the condition of changing scale of production are known as “the laws of returns to scale”. In long run, supply of both labour and capital are supposed to be elastic and, thus, the firms can employ more of both labour and capital to increase their production.

Scale means a particular combination of inputs, in which scale of inputs is changed keeping their ratio constant. The returns to scale refer to the joint return of all inputs of production.

STATEMENT OF THE LAW:

When quantities of the inputs are increased, keeping their ratio constant, there are technically three possible in which the total output can increase;

i.It may increase more than proportionately (law of increasing returns to scale),

ii.It may increase proportionately (law of constant return to scale), and

iii.It may increase less than proportionately (law of decreasing return to scale).