Question

Explain specialization and increasing returns to scale in the short run.

Answer 1

Answer :

Specialization

Specialization is a concept related to economies of scale principle where companies will have a cost advantage when their production increases and becomes more efficient. Here, it indicates that workers will have to focus on only one job rather than focussing on multiple jobs which leads to partial efficiency in all jobs. In order to increase the productivity of the company, the workers have to be efficient and become a specialist in that job rather than doing multiple ones. In the beginning, efficiency might be less but over time, it'll grow impacting the productivity.

Increasing returns to scale

Returns to scale principle is slightly different from economies of scale. Here, the companies will get a change in productivity proportionate with respect to the change in input. The change can be either positive or negative according to the conditions.

When there is an increasing returns to scale, it essentially means that in production, when the input increases, the output rises by a larger proportion than the input.

For example, if the input has been increased two folds, the output might get increased by 6 folds and in that case, output rised more in proportion than the input.

Returns to scale is used as a method to calculate the efficiency of the production process. It is applicable to long term results only as returns to scale principle considers all factors of production such as land, labor, etc. and it does not yield results if short term proportionate changes happen in the company. The case of increasing returns to scale is that with all factors variable, at first there will be an increase in production disproportionately, then a stage of decreasing production followed by constant production rates. It is applicable only to long term when all factors are variable. In the long run, there are no fixed inputs which is not the case of a short run where one or more factors could be fixed. Change occurs in short run due to change in factor proportions while change occurs in long run due to changes in scale of production. The theory of changes in output in short run is linked with law of variable proportions while in the case of long run, it is related to law of returns to scale.