Economics, 3rd Edition

RETURNS TO SCALE

Our analysis has shown that in the short run the firm has some options for increasing output by varying 

some factors of production – it can hire more workers or reorganize production processes, for example. 

In the long run, the firm is able to increase all factors of production and change capacity. Figure 6.5 shows 

three effects on production in the long run which are referred to as returns to scale.

Assume that business has been good for our pizza factory owner. Paolo has utilized his existing 

resources efficiently but finds that he is not able to supply the market with all that he could because of 

the constraints of the capacity of the factory. He knows that increasing the number of worker hours and 

machine hours will generate increased output up to a point, but that diminishing marginal productivity is a 

likelihood if factory space is held constant.

In the long run, the firm can expand all the factors of production. Our factory owner could search for 

a new site on which to build a new factory or could purchase an existing factory and equip it to produce 

pizzas. If all the factors of production are changed then the firm will be able to operate at a different scale.