Managerial economics

In the long run all factors of production are variable. No factor is fixed. Accordingly, the scale of production can be changed by changing the quantity of all factors of production. Definition : “The term returns to scale refers to the changes in output as all factors change by the same proportion.” Koutsoyiannis Returns to scale are of the following three types: 1. Increasing Returns to scale. 2. Constant Returns to Scale 3. Diminishing Returns to Scale 1.  Increasing Returns to Scale: Increasing returns to scale refers to a situation when all factors of production are increased, output increases at a higher rate. It means if all inputs are doubled, output will also increase at the faster rate than double. Hence, it is said to be increasing returns to scale. This increase is due to many reasons like division external economies of scale. Increasing returns to scale can be illustrated with the help of a diagram 8.   In figure 8, OX axis represents increase in labour and capita...

Production Function   is the relationship between physical inputs (land, labour, capital, etc.) and physical outputs (quantity produced). It is a technical relationship (not an economic relationship) that studies material inputs on one hand and material outputs on the other hand. Material inputs include variable and fixed factors of production. In the words of   Watson , “Production Function is the relationship between a firm’s production (output) and the material factors of production (input).” Algebraic and Graphical Representation of Production Function In a standard equation, the Production function is represented by Q, Labour (Variable element) is represented by L, and Capital (Fixed element) is represented by K. For example,  When there are 4 units of labour and 5 units of capital, the equation for the production function is Q = f(4,5).   In the above graph, X-axis represents inputs that are being used in the production process and Y-axis represents outputs tha...