The EzyEducation website uses cookies to help ensure we give you the best experience.
If you continue without changing your settings, we assume that you are happy to receive all cookies on the EzyEducation website.
Please refer to our Privacy and Cookies Statement to

find out more.

Continue

Increasing Returns to Scale

When a firm increases all the factors of production by a factor and output increases by more than that factor. As a result the average cost for the firm will be falling as output exceeds inputs.

Below is an illustration of how a business would achieve increasing returns to scale. Assuming this firm only uses capital and labour as its inputs. A doubling of the capital and labour input leads to greater than doubling of output as well. Because the average cost is calculated by the total costs/output, if the costs are increasing slower than output, average costs fall over time.

Forgot your password?