Decreasing returns to scale
Also called: DRS · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Decreasing returns to scale (DRS) means that when all inputs rise in the same proportion, output rises by a smaller proportion. Formally, f(tx₁, tx₂) < t·f(x₁, x₂). If inputs double, output less than doubles. It is a long-run idea. It happens because a very large firm becomes hard to manage and coordinate, or because natural inputs run short. Under DRS, long-run average cost rises.
Example
Take the Cobb-Douglas function q = L^0.3 K^0.5. The powers add to 0.8, which is less than 1. If both inputs double, output rises only about 1.74 times.
Don't confuse with
- Diminishing returns to a factor: this is a short-run idea, where only one input rises and the others are fixed. Falling marginal product does not mean DRS.
Related concepts
- Returns to scale
- Increasing returns to scale
- Constant returns to scale
- Cobb-Douglas production function