Definition of constant returns to scale
When an increase in inputs (capital and labour) cause the same proportional increase in output.
Constant returns to scale occur when increasing the number of inputs leads to an equivalent increase in the output.
Returns to scale occur in the long run – when both labour and capital are variable.
Another example of constant returns
Constant returns and economies of scale
If a firm has constant returns to scale – we are more likely to have minimal economies or diseconomies of scale.
However, even with constant returns to scale, a firm could still experience economies of scale (lower average costs with increased output). This is because:
- Bulk buying economies – buying bigger quantity of input may enable lower cost of average purchase (due to bulk buying economies)
- Marketing/financial economies
Comparison with decreasing returns to scale
Decreasing returns to scale occurs when increasing inputs leads to a proportionally smaller increase in output.
Increasing returns to scale – when an increase in inputs leads to bigger proportional increase in output.