Basing our understanding of the function above, we can now define a more specific production function – the Cobb Douglas Production Function. These inputs are L (amount of labour) and K (hours of capital). The above mathematical equation tells us that Q (output) is a function of two inputs (assumption). Let us begin with a simple form a production function first – Source: FAO Cobb-Douglas Production FunctionĪs we know, a production function explains the functional relationship between inputs (or factors of production) and the final physical output. The figure given below captures how the production function looks like in case of increasing/decreasing and constant returns to scale. Thus, constant returns to scale are reached when internal and external economies and diseconomies balance each other out.Ī regular example of constant returns to scale is the commonly used Cobb-Douglas Production Function (CDPF). For example, if twice the inputs are used in production, the output also doubles. When the output increases exactly in proportion to an increase in all the inputs or factors of production, it is called constant returns to scale. Thus, if we double the inputs, the output will increase but by less than double. In this case, internal or external economies are normally overpowered by internal or external diseconomies. ![]() When the output increases less than proportionately as all the inputs increase proportionately, we call it decreasing returns to scale or diminishing returns to scale. Thus, when inputs double, output more than doubles in this case. External economies of scale might be one of the reasons behind such increase in output in increasing returns to scale. This represents a kind of decreasing the cost to the firm. When the output increases more than proportionately when all the inputs increase proportionately, it is known as increasing returns to scale. There are three defined types of returns to scales, which include: Increasing Returns to Scale Shapes of Total Product, Average Product and Marginal Product.Total Product, Average Product and Marginal Product.Browse more Topics under Production And Costs Thus, returns to scale are defined as the change in output as factor inputs change in the same proportion. Thus, the scale of production can be changed as inputs are changed proportionately. No fixed factors exist in the long run and all factors become variable. ![]() The long run refers to a time period where the production function is defined on the basis of variable factors only.
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