Managerial Economics and Strategy, 2/e

5.4 Returns to Scale

So far, we have examined the effects of increasing one input while holding the other input constant (shifting from one isoquant to another) or decreasing the other input by an offsetting amount (moving along an isoquant). We now turn to the question of how much output changes if a firm increases all its inputs proportionately. The answer helps a firm determine its scale or size in the long run.

In the long run, a firm can increase its output by building a second plant and staffing it with the same number of workers as in the first one. Whether the firm chooses to do so depends in part on whether its output increases less than in proportion, in proportion, or more than in proportion to its inputs.

Constant, Increasing, and ...