Return to
variable factor input is the relationship between changes in a particular
variable factor input and total output, with all other factors held constant.
Increasing returns occur where DQ/Q > DL/L
where L is the variable factor input. In other words, a change in variable
factor input returns a greater than proportional change in total output.
Diminishing returns occur where DQ/Q < DL/L and constant returns where DQ/Q = DL/L.
Return to factor input is a short term relationship because in the long run the
“other factors” (like fixed costs) cannot be held constant.
Return to
scale is the relationship between changes in all factors put together and total
output. Increasing returns to scale occur where DQ/Q > D(L,C)/(L,C), where (L,C) is the total
variable and fixed factors of production. Because all factors are lumped
together as if they were variable costs, this is a long term relationship.
Factor and
scale returns can be classified as increasing, diminishing or constant only
over a particular range. Over the entire range of possible outputs, all three
types of returns will most likely be evident. There is no relationship between
factor and scale returns.