Isoquants : An Isoquant is a curve representing various combinations of two

variable inputs that produce same amount of output.

- This is also known as Iso-Product curve, Equal-Product curve or Production
Indifference curve.
Laws of Returns to Scale
The percentage increase in output when all inputs vary in the same proportion is
known as returns to scale. It obviously relates to greater use of inputs maintaining
the same technique of production.
Three Situations of Returns To Scale
- Increasing Returns to Scale Output increases by a greater proportion than the
increase in input.
- Constant Returns to Scale Output increases in same proportion as increase in
inputs.
- Decreasing Returns to Scale Output increases in a lesser proportion than the
increase in input.
Economies of Large Scale Production

The law of returns to scale examines the relationship between output and the scale of inputs in
the long-run when all the inputs are increased in the same proportion.
This law of returns to scale is based on the following assumptions;

All factors are variable but the enterprise is fixed.

There is no change in technology.

Perfect competition prevails in the market.

Returns are measured in physical terms.

Three Phases of the Law of Returns to Scale

Depending on whether the proportionate change in output exceeds, equals or decrease in
proportionate to the change in both the inputs, the production is classified as increasing returns to
scale, constant returns to scale and decreasing returns to scale.
1. Increasing Returns to Scale

Increasing returns to scale arises due to the following reasons.

1. Dimensional economies,
2. Economies flowing from indivisibility
3. Economies of specialization
4. Technical economies,
5. Managerial economies,
6. Marketing economies
Alfred Marshall explains increasing increasing returns in terms of increased efficiency of labor
and capital in the improved organization with the expanding scale of output and employment of
factor unit. It is referred to as the economy of organization in the earlier stages of production.
2. Constant Returns to Scale
As a firm continues to expand, it gradually exhaust the economies, internal and external, which
enabled the operation of increasing returns to scale. In this stage, the economies and diseconomies of scale are exactly in balance over a particular range of output. In the case of
constant returns to scale increases in all the inputs cause proportionate increases in output.
A production function showing constant returns to scale is often called Linear and
Homogeneous or Homogeneous of the first Degree. The Cobb-Douglas production
function evolved by the American economists Cobb and Douglas is a linear and homogeneous
production function.
3. Diminishing Returns to Scale
When a business firm continues to expand even beyond the point of constant returns, stage
comes when diminishing returns to scale set in. There are decreasing returns to scale when the
percentage increase in output is less than the percentage increase in input. As the size of the firm
expands, managerial efficiency decreases. Another factor responsible for diminishing returns to
scale in the limitation of exhaustibility of the natural resources, for example, doubling of coalmining plants may not double the coal output, because of limited availability of coal deposits or
due to difficult accessibility to coal deposits.