Following are three aspects of returns to scale:
(i) Increasing Returns to Scale : If the output received from a production process increases at a faster rate than the rate of increase in inputs (proportion of inputs remaining the same), then the returns to scale are said to be increasing. Given below figure shows a production function with increasing returns to scale. The line OP is the scale line because a movement along this line shows only change in scale of production. In the given figure, units of labour and capital are doubled from 2 units to 4 units and output more than doubles from 50 units to 130 units. The length OA is greater than the length AB which is greater than the length BC, OA > BC.
(ii) Decreasing Returns to Scale : When the increase in all inputs in the production process is higher as compared to the proportional increase in production, then the decreasing returns to scale accrues. The figure below shows a production function with decreasing returns to scale. It is clear from the figure that by doubling the quantity of factors used in production, the producer is unable to double the production. Returns on the scale decrease due to the increasing scale of diseconomies of production.
(iii) Constant Returns to Scale : Constant returns to scale refers to OA = AB = BC situation in which expansion in output happens exactly in proportion to the expansion in factor inputs. In other words, constant returns to scale means that the size of inputs and the size of the output increase in the same proportion. Doubling the input doubles the output. Here, the input and output are increasing in the same proportion.
