ARE 2150 Lecture Notes - Lecture 18: Average Variable Cost, Variable Cost, Fixed Cost
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Returns to scale: rate at which output increases as inputs are increased proportionately. Increasing returns to scale: situation in which output more than doubles when all inputs are doubled. Constant returns to scale: situation in which output doubles when all inputs are doubled. Decreasing returns to scale: situation in which output less than doubles when all inputs are doubled. Returns to scale need not be uniform across all possible levels of output. For example, at lower levels of output, the firm could have increasing returns to scale, but constant and eventually decreasing returns at higher levels of output. In figure 6. 10 (a), the firm"s production function exhibits constant returns. Twice as much of both inputs is needed to produce 20 units, and three times as much is needed to produce 30 units. In figure 6. 10 (b), the firm"s production function exhibits increasing returns to scale.