The term return to scale refers to the changes in output as all factors change by the same proportion. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS).
In the
long run all factors of production are variable and subject to change due to a
given increase in size (scale). While economies of scale show the effect of an increased output level on unit
costs, returns to scale focus
only on the relation between input and output quantities.
"Returns to scale" is a term that is used to describe the type of changes that may occur to the output of a production process when some type of change takes place with the inputs involved in the process. Within the broader
context of the returns to scale, the results are often qualified
as increasing, decreasing, or constant, depending on what has occurred with the inputs and how those changes impacted the output of the production process. Identifying the returns to scale aids businesses in determining if those changes are positive
for the company, and may even aid in providing valuable
data that can be used to reverse an emerging negative trend.
One way to understand returns to scale is to think in terms of what will happen when factors shift and have an effect on the total output of the operation.
For example, if the production line is shut down for a few days due to an equipment failure and there is no time to make up that lost time later in the accounting period, there is a good chance that the output for the period will be adversely affected
in terms of finished units produced. When
considered in light of the costs of repairing and restarting the machinery are taken into consideration, this may indicate a decreased returns to scale.
At the same time, if changes
in the production process make it possible to produce more finished units with the same level of resources consumed, those changes in the input factors lead to increased output that may be identified as an increased returns to scale.
When changes
to the inputs make no real difference in the relationship between inputs and outputs, the production is said to be constant returns to
scale.