Graphically show the points of optimum production of constant, increasing and decreasing return to scale

Returns to scale are of the following three types:

(i) Constant returns to scale

(ii) Increasing returns to scale

(iii) Decreasing returns to scale

(i) Constant returns to scale: The production is said to generate constant returns to scale when the proportionate change in input is equal to the proportionate change in output.

For example, when inputs are doubled, so output should also be doubled, then it is a case of constant returns to scale.

Figure-(a): Constant returns to scale

In fig-a, doubling inputs from 3L & 3K to 6K & 6L double output from 100 to 200 and so on. Thus OA = OB = OC.

(ii) Increasing returns to scale: If the proportional change in the output of an organization is greater than the proportional change in inputs, the production is said to reflect increasing returns to scale.

For example, if all inputs are increased by 10%, output increases by more than 10%.

In figure-(b), output can be doubled or tripled by less than doubling or tripling the quantity of inputs. Thus OA > AB > BC and isoquants become closer together.

(iii) Decreasing returns to scale: Decreasing returns to scale refers to a situation when the proportionate change in output is less than the proportionate change in input.

For example, increasing all inputs by 10% increases output by less than 10% and doubling all inputs less than doubles output.

In figure-(c), output changes proportionately, less than labor and capital and OA < AB < BC.