Returns to Scale and

Cobb Douglas
Production Function
 Returns to Scale
 Indicates the scaling up of a production function
in the long run
 Indicatesthe increase in output with the
proportionate increase in input

 Increasing Returns to Scale

 Decreasing Returns to Scale
 Constant Returns to Scale
 Increasing Returns to Scale (IRS)
 Output double more than the doubling of inputs
 Larger Scale of Operation
 Managers and workers are specialized in handling their
task
 Sophisticated and large scale factories equipment
 Automobile Assembly line is an example of IRS
 If IRS exists then it is economically advantageous to have
one firm producing rather than many small firms
IRS
 Constant Returns to Scale (CRS)
 Output doubles when inputs are also doubling
 Size of the firm’s operation does not affect the productivity of its factors
 Large Travel agency provide same service to the client using same ratio of
capital (office space) and labor (travel agents)
 Decreasing Returns to Scale
 Output may less than double when all inputs
double
 Largescale operation –difficulty in organizing and
running the same
 Communication between workers and managers
are not there
 RIDGE LINES or Economic Zone of Production
 Theridge lines are the locus of points of isoquants
where the marginal products (MP) of factors are
zero.
 Theupper ridge line implies zero MP of capital
and the lower ridge line implies zero MP of
labour.
 Production techniques are only efficient inside
the ridge lines.
 The marginal products of factors are negative and
the methods of production are inefficient outside
the ridge lines.
 Curves О A and OB are the ridge lines on the oval-shaped
isoquants
 In between these lines on points G, J, L and N and H, К, M
and P economically feasible units of capital and labour can
be employed to produce 100, 200, 300 and 400 units of
the product.
 ОТ units of labour and ST units of the capital can produce
100 units of the prod­uct, but the same output can be
obtained by using the same quantity of labour ОТ and less
quantity of capital VT.
 Thus only an unwise producer will produce in the dotted
region of the iso-quant 100.
Cobb Douglas Production Function
  special form of production function
 Q = ALαKβ                                   
where L = quantity used of labour
K = quantity used of capital
Q = quantity of output produced
A, α, β = positive constants.
 parameter A is the efficiency parameter.
 It serves as an indicator of the state of technology.
 The higher the value of A, the higher would be the level of output that
can be produced by any particular combination of the inputs.
 α and β are the distribution parameters. They have to do with the
relative factor shares in the product. 
Properties of Cobb Douglas Production
 C-D production function is a homogeneous
function, the degree of homogeneity of the
function being α + β.
 Average and marginal products of L and K, i.e.,
APL, APK, MPL, and MPK would all be the functions
of L-K or K-L ratio.
 MRTSL.K = MPL/MPK = function of L/K ratio.