Question

Increasing return to scale

Answer 1

Increasing returns to scale occurs when an increase in the inputs to a production process results in a more than proportional increase in the output. In other words, it means that a firm can produce more output as it increases its inputs, such as labor, capital, or raw materials, at a lower cost per unit. This is due to economies of scale, which arise from factors such as specialization, division of labor, and efficiency gains. For example, when a firm doubles its inputs, it may be able to produce three or four times as much output, rather than just double, which leads to reduced costs and increased profitability.