RETURNS TO SCALE CONTD

DIMINISHING RETURNS TO SCALE (DRS)

Diminishing returns or increasing costs refer to
that production situation, where if all the factors
of production are increased in a given
proportion, output increases in a smaller
proportion. It means, if inputs are doubled,
output will be less than doubled. If 20 percent
increase in labour and capital is followed by 10
percent increase in output, then it is an instance
of diminishing returns to scale.
1L+1K=10
2L+2K=18
3L+3K=24
As inputs are doubled , output is less than doubled: it
increases from 10 to 18 units (i.e percentage increase=
Increase/ original x 100=8/10x100=80 %). It means
100% increase in inputs leads to 80% increase in
output. Similarly 50% increase in inputs leads to
increase in output from 18 units to 24 units i.e by
10/18*100= 33.33%. Clearly ,output increases less
than the proportionate increase in inputs. This kind of
relationship between the inputs and output exhibit
DRS.
 CAUSES OF DRS
1. Diseconomies of scale: Diminishing
returns to scale is due to diseconomies of
scale, which arises because of the
managerial inefficiency. Generally,
managerial inefficiency takes place in large-
scale organizations.
2. Exhaustibility of limited natural
resources. For example, a coal mining
organization can increase the number of
mining plants, but cannot increase output
due to limited coal reserves.
 CAUSES OF DRS
3. Lack of Coordination : As scale of
operation increases there arises difficulties in
coordination. Close coordination is replaced
by remote coordination which delays project
and escalates cost of production.
Returns to Scale at a Glance