RETURNS TO SCALE (contd)

CONSTANT RETURNS TO SCALE (CRS)

 CRS
When increase in output is proportionate to
increase in inputs, it exhibits CRS e.g if L and K
are doubled (or tripled) and output is doubled (or
tripled) , then returns to scale is constant.
IL+IK=10
2L+2K=20
3L+3k=30
 CRS CONTD

In simple words it means 50% increase in inputs

leads to a 50 % increase in output. This
relationship between a proportionate change in
inputs and the same proportionate change in
output is known as CRS.
 Explanation
We have already pointed out that in an industry where nature’s influence is
dominant, e.g., agriculture, diminishing returns set in quickly, and where
man is supreme; the law of increasing returns operates. But where the
influence of the two is equally balanced, we shall have constant returns.
In every industry, we find the influence of both man and nature. Nature
controls the raw materials, while man directs the manufacturing side. If
there is an industry where the cost of raw materials and the manufacturing
costs are half and half, we can say that both man and nature influence
equally. Such an industry would be subject to the law of constant returns.
A possible example of such an industry is the woollen blanket-weaving
industry. Here the raw material (wool) is supposed to cost about as much as
the other manufacturing costs put together. If, there is an integration of the
extractive and manufacturing industries e.g., sugar-making and cane-
growing, steel-making and iron-ore mining, dairying and agriculture— the
law of constant returns may operate.
 CAUSES BEHIND CRS
Limits of Economies of Scale: When firm expands its
scale of operation , economies arise from such factors
like indivisibility of inputs, greater possibility of
specialization of K & L , use of more efficient
technique of production etc. But there is a limit to the
economies of scale . When economies of scale ( cost
reducing benefits) reach their limits and diseconomies(
disadvantages which increase cost of production) are
yet to begin, returns to scale become constant.