For example, suppose a firm has increased its labour from 5 to 10, land from 50 square feet to 75 square feet and invested additional capital of 2, Although, it has achieved a certain level of increase in its production, but the increase is lesser in proportion as compared to the increase in inputs.
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One to one online tuition can be a great way to brush up on your Economics knowledge. Answered by Charles P. Answered by Sophie W. Answered by Ash M. Payment Security. In other words, if all inputs are increased by X, outputs will increase by less than X a lower proportionate increase. As an example, a factory of square feet and workers can produce , tea cups a week. Decreasing returns to scale would occur if all inputs we increased by a factor of 2 to square feet and workers, but output will increase only up to , less than a factor of 2.
Diminishing returns and decreasing returns to scale are both terms closely related to one another. They both look at how increasing levels of inputs beyond a certain point can result in a fall in output. The main difference between the two is that for diminishing returns to scale only one input is increased while others are kept constant, and for decreasing returns to scale all inputs are increased at a constant level.
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