Increasing returns to scale

Indian Economy glossary

Also called: IRS · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"

Meaning

Increasing returns to scale (IRS) means that when all inputs rise in the same proportion, output rises by a larger proportion. Formally, f(tx₁, tx₂) > t·f(x₁, x₂). If inputs double, output more than doubles. It is a long-run idea. Causes include:

  • specialisation and division of labour;
  • large machines that cannot be split into smaller units;
  • dimensional economies (doubling a pipe's width roughly quadruples its cross-section).

Under IRS, long-run average cost falls.

Example

In NCERT's Table 3.1, (1L, 1K) gives 1 unit, while (2L, 2K) gives 10 units. Q = 2L²K² also shows IRS, because its powers add to 4, which is more than 1.

Don't confuse with

  • Economies of scale: these are the fall in cost per unit as output grows. IRS is about physical output. Economies of scale is its cost-side twin.

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