Diminishing Returns to Scale occur when a simultaneous increase in all inputs in the same given proportion result in a less than proportionate increase in the output. With 1L + 1K the output is 20 units. Doubling both the inputs, viz. 2L + 2K should move production to the isoquant showing 40 units of output if the returns to scale were constant. However, in the diagram we see that with 2L and 2K, the production point lies on a lower iso – product curve shown by the dotted line and representing 35 units of output the diagram we see that with the equal addition to both the factors from point a to b is only 15 units as against 20 units in the first case. Again 3L + 3K take production to 50 units shown by the dotted iso – product curve making an addition of only 10 units.
When decreasing returns to scale occur, the successive iso – product curves are at increasing distance for each other
Along the line OP, bc > ab and cd > bc. Same is the case on the other lines OR and OS. This greater distance between iso – product curves shows that successively larger increases of inputs of labour and capital yield less than proportionate increase in output.SUBMIT ASSIGNMENT NOW!