Discuss the different phases of returns to scale

There are three types of return to scale:

(i) Constant returns to scale.

(ii) Increasing return to scale.

(iii) Decreasing return to scale.

(i) Constant returns to scale: It denoted a case where a change in all inputs leads to a proportional change in outputs.

For example: If Labor, Land, capital and other inputs are doubled, then under constant return to scale output would also double. Many handicraft industries such as hair cutting in America show constant returns.

(ii) Increasing return to scale: It also called economics of scale arise where increase in all inputs leads to a more than proportional increase in the level of output.

For example, an engineer planning a small seals chemical plant will generally find that increasing the inputs of labor, capital and materials by 10 percent will increase the total output by more than 10 percent.

(iii) Decreasing return to scale: It occurs when a balanced increase of all inputs leads to a less that proportional increase in total output. In many processes scaling up may eventually reach a point beyond which inefficiencies set in. These might arise because the costs of management or control become large. Many productive actives involving natural resource, such as growing wire grapes or providing clean drinking water to a city show decreasing return to scale.