What is the significance of return to scale in mass production?
Answer:
Returns to scale refers to the change in output if all inputs (capital and labor) are doubled.
1. If the amount of amount is less than twice the previous output, we have decreasing returns to scale.
2. If output exactly doubles, then we have constant returns to scale.
3. If output more than doubles, then we are observing increasing returns to scale.
Economists generally believe that there are increasing returns to scale for small firms. That is, as the firm grows, it becomes more efficient because workers can start to specialize in certain parts of the production process, rather than covering all the bases.
Likewise, when the firm gets really large, decreasing returns to scale set in. This happens, for example, if communication and management within the firm becomes too cumbersome and the firm becomes less productive.
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