Factor combination in the long run, Managerial Economics

Assignment Help:

Factor combination in the long run

In the long run it is possible to vary all factors of production. The firm is therefore restricted in its activities by the law of diminishing return to scale.

The law states that successive proportionate increments in all inputs simultaneously will lead eventually to a less than proportionate increase in output.

Returns to scale refers to the rate at which output increases as all inputs are increased simultaneously.  In the illustration below, labour and land are assumed to be the factors of production.

Land (units)                 Labour (units)             Output (units)

30                                             5                                                          41                     Increasing returns

60                                             10                     '                                   100

90                                             15                                                         168                   Constant returns

120                                           20                                                         224

150                                           25                                 '                       275                   Decreasing returns

180                                           30                                                         300

When land increases from 30 units to 60 units and labour from 5 units to 10 units, each has doubled or increased by 100%.  Output increases from 41 units to 100 units i.e. by more than 100.  When land increases from 60 to 90 units, each has increased by 50%.  Output increases from 100 to 168 i.e. by more than 50%.  In each of these cases when the inputs are increased in a certain proportion, output increases in greater proportion.  We say that the firm is in a stage of increasing returns to scale.

This should not be confused with the stage of increasing   returns in the short run.  In the short run.  In the short run the increasing returns  to the variable factor, and the scale of production fixed.

When land is increased from 90 to 120 units and labour from 12 to 16 units, each has increased by 1/3 or 33 1/3% output increases from 168 to 224, i.e. by 1/3 or 33 1/3.  Thus, when the input factors are increased in a certain proportion, output increases in the same proportion.   This is a stage of constant returns to scale.

When land is increased from 120 to 150 units and labour fro 20 to 25 units, each has increased by 25%.  Output increases from 224 to 275 units i.e. by less than 25%.  When land increases from 150 to 180 and labour from 25 to 30 units, each has increased by 20%, output increases from 275 to 300 i.e. by less than 20%.  In both of these cases, when the inputs are increased in a certain proportion output increases in 20%.  The firm is said to be in a stage of decreasing returns to scale  not to be confused with diminishing returns to the variable factor in the short run.


Related Discussions:- Factor combination in the long run

Illustrate about demand theory, Illustrate about Demand theory Demand t...

Illustrate about Demand theory Demand theory is one of the core theories of consumer behaviour andmicroeconomics. It attempts at answering questions regarding the magnitude of

A cost-push inflation , A cost-push inflation have as a result of workers' ...

A cost-push inflation have as a result of workers' attempts to push up their wages. Thus, inflation does not have to be monetary phenomenon." Is this statement true, false, or unce

Unit elasticity of supply, Unit Elasticity of Supply Supply is said to...

Unit Elasticity of Supply Supply is said to be of unit elasticity if changes in price bring about changes in quantity supplied in the same proportion.  Thus, when price rises,

Projection method of demand forecasting, Explain trend projection method of...

Explain trend projection method of demand forecasting with illustration.

Non-accelerating inflation rate of unemployment, NON-ACCELERATING INFLATION...

NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT   During 1970s economists encountered a puzzle  in  the sense that  inflation and unemployment  data  did not  fit  into the Phi

Exceptional supply curves, Exceptional supply curves In have some situ...

Exceptional supply curves In have some situations the slope of the supply curve may be reversed.   i)   Regressive Supply.   In this case, the higher the price within a ce

Elasticity of demand, a. Explain why the demand for a particular brand is m...

a. Explain why the demand for a particular brand is more elastic than the demand for all cigarettes. If Lucky Strike raised its price by 1% in 1918, was the price elast

Illustrate the sources of monopoly, Q. Illustrate the sources of monopoly? ...

Q. Illustrate the sources of monopoly? Merger for Large-scale Production: Thirdly monopoly undertaking can be a consequence of the necessity to produce on a large scale to de

Annual and monthly premiums charged, Green Shield Insurance gives NEMO Corp...

Green Shield Insurance gives NEMO Corporation with coverage for prescriptions, dental work, and extended health services. Every subscriber uses $435 worth of dental services per ye

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd