In the short – run analysis while some inputs are fixed, i.e. their quantity used in production cannot be altered, output can be increased only by increasing the quantity of variable inputs. The resulting change in the proportion of increasing the quantity of variable inputs. Used leads to operation of the law of variable proportions, which eventually culminates in diminishing returns. When we enter the long period i.e. a time period in which no input remains fixed, each input can be changed and thus the factor proportion can be maintained. For example, if the production Q = f (L, K)
And that L (labour) and K (capital) are being used in a certain ratio, then in the long – run one can increase both K and L and maintain the same ratio. Does it mean that with unchanged proportion of factor inputs, production would increase in the same proportion in which capital and labour have been increased. A simultaneous change in all inputs in the same proportion is t technically called change in scale of operations and the resulting change in output is called returns to scale. This means that the change in all inputs as against the short period analysis where change in output is associated with change in the variable input only is called returns to a variable factor.
About the long – run behavior of production when all inputs are simultaneously increased thereby maintaining their proportion the pattern is similar as the short – run behavior. This means as scale’ over some range of production. This happens when an increase in all inputs results in scale is in more than proportionate increase in the output and thus marginal returns to scale is increasing. Then, for some range of output we may have ‘constant returns to scale’ where production changes in the same proportion as changes in all input. But eventually ‘diminishing returns to scale’. i.e. output would increase less than in proportion to change in inputs or production will increase at a diminishing rate, is bound to arise. Thus, even in the long – run when none of the inputs remain fixed, the returns to scale would follow the pattern of increasing returns, constant returns and diminishing returns to scale. The reasons for this behavior are explained by the economics and diseconomies of scale.
SUBMIT ASSIGNMENT NOW!