Question

Provide 3 mechanisms by which firms may achieve internal increasing returns. What happens to cost/output as firms increase in size/scale in such a situation?

Answer 1

The law of increasing returns states that when doubled the input will result in more than double the output of the firm. The basic concept is that the additional or marginal cost of the firm decrease over an increase in the level of the production. The mechanism can firm use to make increasing returns are,

1. Introduce new machinery

2. Recruit specialized employees

3. Creating small areas of work

When introducing new machinery can improve the level of production of the firm. The machinery can continuously work than human beings and can produce more output. It will create more output with the less cost

Specialized employees can work hard and use their brain properly. It will result from increasing the level of production and decreasing the cost like wages.

The small work area can make it easy to manage employees and the chance to create a good relationship with the employees. It will result from reducing the wastages of the materials and efficient use of the machinery. Also, the day to day expert advice can given to the employees, and it enhances the production and reduce the level of cost.