Answer to Question #246493 in Economics of Enterprise for adams

Question

Explain the three categories of returns to scale relating to the long-run average

cost curve

Answer 1

Returns to scale means the rate by which output change if all the inputs are changed by the same factor and in other cases the constants return to scale there are three types or three ways the return to scale measures that there is a change in out input and output will change this is a constant returns to scale that meet output and inputs are saying and if the under the increasing return to scale the change in the output is more and if the reason decreasing to return to scale it is less then input out changed compare to output changes.

Average total cost means dividing the total cost by that when total quantity of producers by the company the total cost curve is typically u -shapped and it is based on that a curve moves in upward direction and it is a positive impact and its slopes to down but then it shows a negative impact it is the common bifurcation of all the cost curve in the economy.

There are three categories of return to scale they are as follow: constant returns to scale means where there is an increase in input result in increase in output is there is a constant relation between input and output.

Increasing returns to scale : is when output is increases greater than the proportion then the increase in output it means that if a company has predicted a some amount of output while lying on the basis of input they have put in the production on the basis of that the output has been more than they have predict it so that's why this is called increasing returns to scale.

Decreasing returns to scale : is where the production variables are increased by certain personal result in less than the proportional increase in output it is the reverse of increasing returns to scale.

For example if a detergent manufactures double it input but get only a 30% increase in a total of 28 it can has said the decreasing returns to scale if the same manufactures ends up doubling its total output and it achieve constant returns to scale that means that the input has increased by 60% then he will get the 60% output if the output is increased by 110 % then the manufacture experience the increasing returns to scale has the return to scale is your only based on the input or the percentage of put the company is inputting in in the production and we just can predict the output on this and decide whether it is constant decrease or increase returns to scale.

The return to scale is applied only in case of long run has the Average cost curve is based on the the return to scale as we can conclude that in case of of increasing return to scale in which the cost curve will slope upward because there if the same amount of power input pyar inputting and we are getting doubled of the output means increased in the proportion of the outputs of the slope of the curve will move upward in case of decreasing returns to scale the slope of the average cost curve will be move downward has the company put the same amount of input and getting a less than the proportion of the output it result the negative impact on the horse kab has well as on the production side of the companies so if there is downwards return to scale then the curve of the average cost will move downward and in case of the constant returns to scale there will be a parallel line in x axis and y axis because there the amount of input output by the company is the same amount of output is cating and written there is no increase and decrease in the proportion of the output so the cost curve will be in the article line or The parallel parallel to x axis there we can conclude that in the long run a company should prefer constant and increasing return to scale which is more beneficial but but sometimes in such cases the company faces the downward returns to scale so the conclusion is there are three categories in constant increase and decrease of returns to scale related to the long run of average cost which we stated that the company should prefer increase and consent if the company wants to make a stable and deals in the market for a longer period of time then they should prefer or they prefer the constant returns to scale the main objective of the form is to produce the or make the profits or they may go for of two for the increasing returns to scale.