Diminishing Returns to Scale

When the increase in output is less than proportionate to the given increase in the quantities of all factor-inputs, it is termed diminishing returns to scale. For instance, if the increase in factor-inputs is 20 percent and the resultant increase in output is less than 20 percent (say 15 percent) or a doubling of inputs causes a less than a doubling of output, it is diminishing returns to scale. This is explained in the following example-

 Scale of Production          Total Output (Machine + Labor)                 (Units) 1Machine + 2 Labor                    100 2Machine + 4 Labor                    150

The result is diminishing return to scale. Diminishing returns to scale implies that for a given increase in output factor is required. In other words, proportionate increase in input factors will be more than proportionate increase in output. This Fig illustrates the application of diminishing returns to scale.

Here: –

OR < RP < PG

Or        OR1 < R1P1 < P1G1

OR2 < R2P2< P2G2

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