Decreasing Returns to Scale
Law of Decreasing Returns to Scale Where the proportionate increase in the inputs does not lead to equivalent increase in output, the output increases at a decreasing rate, the law of decreasing returns to scale is said to operate. This results in higher average cost per unit.
DEFINITION
— In the word of Boulding, "As we increase the quantity for any one input which is combined with fixed quantity of other inputs, the marginal physical productivity of the variable input must eventually decline."
— Prof. Benham states, "As the proportion of one factor in a combination of factors is increased after a point, the marginal and average product of that factor will diminish."
— Mr. Joan Robinson, defines it in these words. The law of Diminishing Returns states that with a fixed amount of any one factor of production successive increase in other factor will after a point yield a diminishing increment of output"
All factors of production (land, labor and capital) have been doubled. There is 100 percent increase in the factors of production whereas output has increased from 10 units to 15 units, which is less than double. There is an increase in output by 50%. It means increase in all inputs leads to a less than proportional increase in the output of the firm. Here diminishing returns to scale are operating. Diminishing returns to scale is achieved in those activities involving natural resources such as growing agricultural products.
These laws can be illustrated with an example of agricultural land. Take one acre of land. If you till the land well with adequate bags of fertilizers and sow good quality seeds, the volume of output increases. The following table illustrates further:
From the above table, it is clear that with 1 unit of capital and 3 units of labour, the firm produces 50 units of output. When the inputs are doubled two units of capital and six units of labour, the output has gone up to 120 units. (From 50 units to 120 units). Thus, when inputs are increased by 100 percent, the output has increased by 140 percent. That is, output has increased by more than double. This is governed by Law of Increasing Returns to Scale.
When the inputs are further doubled that is to 4 units of capital and 12 units of labour, the output has gone up to 240 units, (from 120 units to 240 units). Thus, when inputs arc increased by 100 per cent, the output has increased by 100 per cent. That is, output also has doubled. This is governed by Law of Constant Returns to Scale.
When the inputs are further doubled, that is, to 8 units of capital and 24 units of labour, the output has gone up to 360 units, (from 240 units to 360 units). Thus, when input are increased by 100 per cent, the has increased only by 50 per cent. This is governed by Law of Decreasing Returns to Scale.