CA Foundation Exam > CA Foundation Videos > Business Economics for CA Foundation > Laws of Return to Scale
Laws of Return to Scale Video Lecture | Business Economics for CA Foundation
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FAQs on Laws of Return to Scale Video Lecture - Business Economics for CA Foundation
| 1. What are the laws of return to scale? |  |
Ans. The laws of return to scale refer to the relationship between the increase in inputs and the resulting increase in outputs in the long run. There are three laws of return to scale: constant returns to scale, increasing returns to scale, and decreasing returns to scale.
| 2. What is constant returns to scale? | |
Ans. Constant returns to scale occur when an equal percentage increase in all inputs leads to an equal percentage increase in output. In other words, if all inputs are doubled, the output will also double. This implies that the firm's production technology is efficient and does not experience any economies or diseconomies of scale.
| 3. What is increasing returns to scale? | |
Ans. Increasing returns to scale occur when an equal percentage increase in all inputs leads to a more than proportional increase in output. For example, if all inputs are doubled, the output will more than double. This suggests that the firm experiences economies of scale, leading to lower average costs as the scale of production increases.
| 4. What is decreasing returns to scale? | |
Ans. Decreasing returns to scale occur when an equal percentage increase in all inputs leads to a less than proportional increase in output. If all inputs are doubled, the output will increase by less than double. This implies that the firm experiences diseconomies of scale, resulting in higher average costs as the scale of production increases.
| 5. How do the laws of return to scale impact firm's profitability? | |
Ans. The laws of return to scale have a direct impact on a firm's profitability. If a firm experiences constant returns to scale, it can maintain its profitability as it expands its production. On the other hand, if a firm experiences increasing returns to scale, it can significantly increase its profitability as it expands its scale of production. However, if a firm experiences decreasing returns to scale, its profitability may decline as it expands, due to higher average costs.
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Dec 22, 2024 Last updated |
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