The Law of Return to Scale:

The law of return to scale is a concept that explains how an increase in the proportion of inputs to a production process causes an increase in the output of the process. In simpler terms, it is the proportionate increase in output when all inputs (capital and labor) are increased by a certain proportion. The Law of Return to Scale is mainly used to measure the long-run behavior of a production process. Let's understand this concept with the help of a diagram.

Diagram:

The diagram below shows the production possibilities curve (PPC) of a firm. The PPC is the graphical representation of the maximum output that a firm can produce with the given inputs.


In the diagram above, we assume that the firm is using two inputs, capital and labor. The PPC shows the maximum output that can be produced with the given inputs. The curve is concave to the origin, which means that the marginal rate of technical substitution (MRTS) decreases as we move along the curve.

The Law of Return to Scale can be explained with the help of three scenarios:

1. Constant Returns to Scale:
If the firm increases its inputs by a certain proportion, and the output also increases by the same proportion, it is called constant returns to scale. In this case, the PPC will be a straight line passing through the origin. It means that the MRTS is constant along the curve.

2. Increasing Returns to Scale:
If the firm increases its inputs by a certain proportion, and the output increases by a larger proportion, it is called increasing returns to scale. In this case, the PPC will be a curve that is concave to the origin. It means that the MRTS is decreasing along the curve.

3. Decreasing Returns to Scale:
If the firm increases its inputs by a certain proportion, and the output increases by a smaller proportion, it is called decreasing returns to scale. In this case, the PPC will be a curve that is convex to the origin. It means that the MRTS is increasing along the curve.

Conclusion:

The Law of Return to Scale is an important concept in economics, which explains how the output of a firm changes when the inputs are changed. The three scenarios of constant, increasing, and decreasing returns to scale, as explained above, show the long-run behavior of a production process.