Question

What is the difference between diminishing returns and decreasing returns to scale? What kind of returns to scale are possible in a school? Why?

Answer 1

Diminishing returns or diminishing marginal returns take place in the short run when at least one input is held constant. According to the Law of diminishing marginal returns, the addition in one input (or factor of production) , keeping all other inputs constant, results in smaller increases in the total output as the addition made to the factor of input keeps increases. For example, keeping Capital (K) constant, the addition made to Labour will lead to smaller increments in total output and each new labour has lesser capital to work with. Therefore, the per unit increment in output, or the marginal increase in output will decrease.

On the other hand, Decreasing returns to scale is an effect of change in input in the long run when all factors of production or inputs are variable. It refers to a situation when all factors of production are increased by a certain percentage but the increase in output is less-than-proportional. For example, if a cloth manufacturer doubles its input and only receives an additional 60% output, it is said to exhibit decreasing returns to scale i.e the percentage change in output is less than the percentage change in inputs.

Schools exhibit increasing returns to scale as when it increases the number of teachers and the classrooms, increase in output (students) is greater than the increase in inputs.