Distinction Between returns to a Variable Factor And Returns to Scale

Distinction Between returns to a Variable Factor And Returns to Scale

I.   Returns to a Variable Factor. The law of returns to a variable factor states that with the increase in the units of a variable factor, keeping other factors constant, the increase in total production becomes, after some point, smaller an smaller

      In this case marginal product first increase then becomes constant and finally it declines and becomes negative. Thus, the law has three stages: increasing marginal returns; diminishing marginal returns and negative returns.

II.   Returns to Scale. The term returns to scale refers to the change in output as all factor-inputs change by the same proportion in the long run.

The increase in output may be more than, equal to, or less that proportional go the given increase in factor-inputs, hence returns to scale out of three forms-increasing, constant and diminishing.  

S.N.	Returns to a Variable Factor	Returns to Scale
1	Operates in the short run	Operates in the long run.
2	Only the Quantities of factor are varied	All factor-inputs are varied in the same proportion
3	Changes in the factor-ratio.	No change in the factor-ratio
4	No change in the scale of production	Changes in the scale of production.