returns to scale

(noun)

A term referring to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).

Related Terms

Examples of returns to scale in the following topics:

  • Economies and Diseconomies of Scale

    • Increasing, constant, and diminishing returns to scale describe how quickly output rises as inputs increase.
    • Returns to scale explains how the rate of increase in production is related to the increase in inputs in the long run.
    • There are three stages in the returns to scale: increasing returns to scale (IRS), constant returns to scale (CRS), and diminishing returns to scale (DRS).
    • Returns to scale vary between industries, but typically a firm will have increasing returns to scale at low levels of production, decreasing returns to scale at high levels of production, and constant returns to scale at some point in the middle .
    • Identify the three types of returns to scale and describe how they occur

  • Few Sellers

    • An oligopoly - a market dominated by a few sellers - is often able to maintain market power through increasing returns to scale.
    • One source of this power is increasing returns to scale.
    • Most industries exhibit different types of returns to scale in different ranges of output.
    • Cell phone companies have increasing returns to scale, which leads to a market dominated by only a few firms.
    • Explain how increasing returns to scale will cause a higher prevalence of oligopolies

  • Defining the Production Function

    • This is also known as diminishing returns to scale - increasing the quantity of inputs creates a less-than-proportional increase in the quantity of output.
    • If it weren't for diminishing returns to scale, supply could expand without limits without increasing the price of a good.
    • If a firm has a production function Q=F(K,L) (that is, the quantity of output (Q) is some function of capital (K) and labor (L)), then if 2Qreturns to scale.
    • Similarly, if 2Q>F(2K,2L), there are increasing returns to scale, and if 2Q=F(2K,2L), there are constant returns to scale.
    • From this production function we can see that this industry has constant returns to scale - that is, the amount of output will increase proportionally to any increase in the amount of inputs.

  • Long Run Supply Decisions

    • This period of supply is known as "increasing returns to scale," because a proportional increase in resources yields a greater proportional increase in output.
    • A long-run supply curve connects the points of constant returns to scales of a markets' short-run supply curves. ; the bottom of each short-term supply curve's "u."
    • In the early stages of the market, where only one or a few firms are producing goods, the market experiences increasing returns to scale, similar to what an individual firm would experience.
    • Eventually the market reaches a state of constant returns to scale.
    • Eventually, production of goods in a market yields less of a return than the amount of goods that go into product, which causes the market to enter into a period of decreasing returns to scale and the market's supply curve slopes upward.

  • Production and Cost in the Long-run

    • The terms "economies of scale," "increasing returns to scale," "constant returns to scale," "decreasing returns to scale" and "diseconomies of scale" are frequently used.
    • Conceptually, returns to scale implies that all inputs are variable.
    • When α+β = 1, the production process demonstrates "constant returns to scale. " If L and K both increased by 10%, output (Q) would also increase by 10%.
    • When α+β < 1, decreasing returns are said to exist.
    • In Figure V.9 economies of scale are said to exist up to output QLC.

  • The Law of Diminishing Returns

    • The law of diminishing returns states that adding more of one factor of production will at some point yield lower per-unit returns.
    • If the law of diminishing returns holds, however, the marginal cost curve will eventually slope upward and continue to rise, representing the higher and higher marginal costs associated with additional output.
    • However, as marginal costs increase due to the law of diminishing returns, the marginal cost of production will eventually be higher than the average total cost and the average cost will begin to increase.
    • The typical LRAC curve is also U-shaped but for different reasons: it reflects increasing returns to scale where negatively-sloped, constant returns to scale where horizontal, and decreasing returns (due to increases in factor prices) where positively sloped.
    • Both marginal cost and average cost are U-shaped due to first increasing, and then diminishing, returns.

  • Harmonic and Melodic Minor Scales

    • All of the scales above are natural minor scales.
    • Harmonies in minor keys often use this raised seventh tone in order to make the music feel more strongly centered on the tonic.
    • (Please see Beginning Harmonic Analysis for more about this. ) In the melodic minor scale, the sixth and seventh notes of the scale are each raised by one half step when going up the scale, but return to the natural minor when going down the scale.
    • Melodies in minor keys often use this particular pattern of accidentals, so instrumentalists find it useful to practice melodic minor scales.
    • Listen to the differences between the natural minor (http://cnx.org/content/m10856/latest/tonminnatural.mp3), harmonic minor (http://cnx.org/content/m10856/latest/tonminharmonic.mp3), and melodic minor (http://cnx.org/content/m10856/latest/tonminmelodic.mp3) scales.

  • Other Scales

    • The chromatic scale and whole tone scales fall into this category, but other symmetrical scales can also be constructed.
    • Some scales are loosely based on the music of other cultures, and are used when the composer wants to evoke the music of another place or time.
    • Often the name of a scale simply reflects what it sounds like to the person using it, and the same name may be applied to different scales, or different names to the same scale.
    • You may want to experiment with some of the many scales possible.
    • Listen to one version each of:

  • The Blues Scale

    • Blues scales are closely related to pentatonic scales.
    • (Some versions are pentatonic. ) Rearrange the pentatonic scale in Figure 4.68 above so that it begins on the C, and add an F sharp in between the F and G, and you have a commonly used version of the blues scale.
    • Listen to this blues scale: http://cnx.org/content/m11636/latest/BlueScale.mid.

  • Pentatonic Scales

    • Listen to the black key pentatonic scale.
    • For more on patterns of intervals within scales, see Major Scales and Minor Scales. ) Now listen to a transposed pentatonic scale: http://cnx.org/content/m11636/latest/pentatonic2.mid.
    • Any scale that uses only five notes within one octave is a pentatonic scale.
    • Listen to this different pentatonic scale: http://cnx.org/content/m11636/latest/penta3.mid.
    • To get a feeling for the concepts in this section, try composing some short pieces using the pentatonic scales given in Figure 4.67 and in Figure 4.69.