Returns to Scale in Long Run Production

In this revision video we look at the concept of long run returns to scale for businesses using examples from different industries.

Returns to scale refers to how a firm's output changes as it increases or decreases its inputs (labor, capital, etc.). There are three types of returns to scale:

• Constant returns to scale: Output increases in proportion to input increases. For example, if a factory doubles its inputs (labor, capital, etc.), its output will also double.
• Increasing returns to scale: Output increases more than proportionally to input increases. For example, if a factory doubles its inputs, its output may more than double.
• Decreasing returns to scale: Output increases less than proportionally to input increases. For example, if a factory doubles its inputs, its output may increase by less than double.

In general, returns to scale can be a key factor in determining a firm's productivity and profitability.