Question

Diminishing returns and decreasing returns to scale are related concepts. Discuss how a firm can experience diminishing returns to labor while also experiencing increasing returns to scale. Conduct some research and provide a real-world example within the context of your discussion.

Answer 1

A firm is not expected to experience both diminishing returns and decreasing returns at the same time. The reason is that diminishing returns are short run phenomena where only few inputs are varaible and firm cannot change the size of the plant. Decreasing returns is a long run phenomena which occurs only in the long run when all the factors are variable. This is the reason why diminishing returns are always related to a factor while decreasing returns are related to scale.

Diminshing returns: As more and more units of a variable factors are used in production by the firm,the resultant output increase gets narrow and narrow. This leads to a falling marginal physical product

Decreasing returns: When all the inputs are increased simultaneously in a proportion, output is increased but in the a lower proportion so that returns are decreased.

All the major food chain startups including McDonalds. Dominos, and Burger King have experienced diminshing returns when they were constrained by the ability to expand in multiple cities. With time they are able to increase production, plant size and were able to open stores in many cities. Regarding the decreasing retruns to scale, an information indicates that McDonalds once generated 45 million of polystrene annually and with public protest, it had to allocate its inputs which resulted in decreasing returns to scale. With time, the burger maker was able to shift to retruns to scale.