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Discuss the difference between returns to scale and economy of scale.

Discuss the difference between returns to scale and economy of scale.

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The returns to scale shows the relationship between the quantities of inputs and the output. The economy of scale shows the effect of increased production or output on the average cost of production.

If the producer increases the quantity of inputs, it will affect the quantity of output. There are three types of returns to scale. If the proportionate increase of output is same as the proportionate increase of inputs, then it is called constant returns to scale. If the proportionate increase of output is greater than the proportionate increase of inputs, then it is called increasing returns to scale. If the proportionate increase of output is less than the proportionate increase of inputs, then it is called decreasing returns to scale.

In the production process, if the increase in production gradually decreases the average cost of production, then it is said that the firm is experiencing economies of scale.

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Rahul Sunny answered 2 years ago
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