| What is Returns to Scale? (RTS) | This describes the effect on Output of Increasing ALL Factor Inputs by same % |
| What does it mean if there are:
1. Increasing RTS
2. Constant RTS
3. Decreasing RTS | 1. When an Increase in Factor Inputs leads to More % Increase in Output
2. When an Increase in Factor Inputs leads to same % of Output
3. When an Increase in Factor Input leads to Less % Increase in Output |
| How can RTS be used in an LRAC Curve, and what relation does it play with Economics of Scale | -In an LRAC Curve, when its Falling it can be said there’s an Increasing RTS. When its Flatlined - Constant RTS. When its Rising, Decreasing RTS
-This links with Economics of Scale. When Increasing RTS occurs, it contributes to Economics of Scale. This is because More Output is made per Unit of Input, so LRAC falls. (Because more Revenue) When Decreasing RTS occurs, it feeds into a Diseconomies of Scale. |
| What is the Minimum Efficient Scale of Production? | -Lowest Level of Put at where the Minimum Possible Average Cost is Possible. This happens when Returns to Scale become Constant.
-There can be a Range of Production Levels where LRAC is Minimal, or just One
-MES can be Different across Industries - High Fixed Costs has Large MES which can Favour Large Firms more. |
