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The topic of Two Variable Law of Returns to Scale is of huge importance to economics students. Every factor of production emerges as a variable because no factor remains fixed in the long run.

Due to this reason; the scale of production becomes changed via a modification in all factors of production. If you are stuck with assignments and not finding a solution to this you can contact the best Australian writers of BookMyEssay to get the best Two Variable Law of Returns to Scale assignment help.

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What Must You Know About the Laws of Returns to Scale?

You can explain the laws of returns to scale with an isoquant approaches. This law is referred to the effects of changes that happen in the scale of inputs or factors upon output in a long run at a time when integration of factors is altered equally.

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When two factors like capital and labor, are increased and that too in the same amount then output augments in the same proportion. This is the situation of constant returns to scale. When you wish to secure equal augmentations in both and when these factors are enhanced in bigger proportionate units, then decreasing returns to scale happens.

To get equal augmentations in output, if these factors are enhanced in little proportionate units then increasing returns to scale happens.

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An Overview of Returns to Scale Versus Diminishing Marginal Returns

Businesses are required to reach optimal production levels as it ensures that every factor of production has been utilized in its finest capacity. When adjustments are made to the inputs or factors of production, it leaves differing effects. People can analyze these effects in various methods. Diminishing marginal returns is acknowledged as an effect of augmenting input in the short period after the maximum capacity gets reached. Here, one production variable remains constant, like capital or labor.

According to this law, an increase in input results in little augmentations in output. The returns to scale do the job of measuring the alterations that happen in productivity.

The diminishing marginal returns tell that when every factor remains constant, then with each additional unit in a factor of production, the incremental output/unit will lessen at some point. It does not mean that when you increase one factor it will decrease the total production.

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What is Returns to Scale?

Returns to scale is referred to the amount between the augmentation in general input and the resultant augmentation in output.

There are 3 types of returns to scale:

  • Increasing Returns to Scale or IRS
  • Decreasing Returns to Scale or DRS
  • Constant Returns to Scale or CRS

In the IRS, the output increases in a larger proportion compared to an increase in input.

In the DRS when every production variable is increased by a specific percentage, it results in a lesser-than-proportional augmentation in output.

In the CRS, an augmentation in input results in a relative augmentation in output.

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