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In production returns to scale refers to changes in output subsequent to a proportional change in all inputs. ( where all inputs increase by a constant factor)
It refers to the production situation where if all factors of production are increased in a given proportion , output increases in a greater proportion. Thus, if by 100% increase in factors of production , output increases by 120% , it will be an instance of INCREASING RETURNS TO SCALE.
4 30 2 10 20
10
Labor (hours)
It refers to that production situation where if all factors of production are increased In a given proportion, the output produced increases in exactly the same proportion.
If 25% increase in labour and capital is followed by 25% increase in output, then it is an instance of CONSTANT RETURNS TO SCALE.
A 6
30
4 20 2 10
10
15
Labor (hours)
It refers to that production function where if all the factors of production are increased In a given proportion , the output increases in a smaller proportion. If 20% increase in labour is followed by 10% increase in output, then it is the case of DIMINISHING RETURNS TO SCALE
Returns to Scale
Capital (machine hours)
20
2 15
10 0 5 15
Labor (hours)
UNWISELY MANAGEMENT
NON AVAILABILITY OF INPUTS
Economies of Scale
When more units of a good or a service can be produced on a larger scale, with less input costs, economies of scale are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized.
Division of labour and specialization are the two key means to achieve a larger return on production.
Through these two techniques, employees would not only be able to concentrate on a specific task, but with time, improve the skills necessary to perform their jobs. The tasks could then be performed better and faster. Hence, through such efficiency, time and money could be saved while production levels increased.
Diseconomies Of Scale
What Does Diseconomies Of Scale Mean? An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.
TPP (Units) 5 11 18 24 30 35 40
Description
CONCEPT OF RETURNS TO SCALE ILLUSTRATED WITH THE HELP OF SINGLE PRODUCTION FUNCTION
Suppose our production function is as follows: Q = f (L ,K) This production function tells us that the firm produces Q output with the help of L units of labor and K units of capital. Now suppose , that the firm increases amount of L and K factors t (t > 1) times then the new output level will be : Q1 = f ( tL , tK) now there can be 3 possibilities : i) If the new output level is greater than t times the previous level of output , the production function exhibits increasing returns to scale . So , mathematically : f ( tL , tK) > t . f (L ,K) ; for all t > 1
ii) If the new output level is equal to t times the previous level of output , the production function exhibits constants returns to scale . So , mathematically :
f ( tL , tK) = t . f (L ,K) ; for all t > 1
iii) If the new output level is less than t times the previous level of output , the production function exhibits diminishing returns to scale . So , mathematically : f ( tL , tK) < t . f (L ,K) ; for all t > 1
The Cobb Douglas production function is given by : Q=AL.K ; where and are constants.
if we increase both the inputs ( t > 1 ) times , we get the new output as Q1 = (tL) (tK) = t + L K when , + = 1 we have Q = t . Q1 . So the production function exhibits Constant Returns to Scale. when + > 1 , the production function exhibits Increasing Returns To Scale. when + < 1 , the production function exhibits Decreasing Returns To Scale.
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By the late 1940s this array of tufted-textile consumer goods produced annual sales of more than $50 million.
Carpet industry sales topped $1 billion annually in the early 1960s and surpassed $2 billion in the early 1970s
The carpet industry became the fourth-fastest-growing industry in the United States during the 1960s, surpassed only by television picture tubes, aircraft, and computers. The number of competitors in the carpet industry grew from 88 in 1958 to more than 400 by the late 1970s, with a majority of those firms located in Georgia
In present scenario USA and Germany still continues to hold their top position in the table of 2009, market is now globalised which shows new trends in carpet consumption and potential of different countries to be a big market in the future .
The top five manufacturers ranked according to their shipment in millions of dollars in 2005 are:
Manufacturers
2005
1. Shaw 2. Mohawk 3. Beaulieu 4. Interface 4346 3779 1115 421
2001
4012 3350 1300 639.8
1996
3202 1795 1006 820
Reasons:
Consumer demand:
Demand for wool, nylon, polypropylene carpets in commercial and residential uses has gone up. Innovations: Introduction of larger, faster and more efficient carpet-tufting machines.
Competition Improvements in the processing of key production inputs (such as stainresistant yarns)
These reasons have not only reduced costs but also greatly increased the carpet production.
Results
Manufacturers increased their scale of operations by installing larger and more efficient machines in larger plants. The use of labor in these plants has also increased significantly. The result is: Large industries: Proportional increases in inputs have resulted in a more than proportional increase in the output. increasing returns to scale. Small industries: Small proportional increases in inputs have only increased output proportionally. constant returns to scale
Increases in scale of operating have occurred by putting in larger and more efficient machines into larger plants