Question

Discuss two reasons for increasing returns to scale.

Answer 1

1. Economies of Scale: As a firm grows, it enjoys cost advantages like bulk buying of inputs, efficient transport, and administrative specialisation. These reduce per-unit costs and increase output more than proportionately.
2. Specialization and Division of Labour: Larger scale enables greater specialisation among workers and machinery. This improves productivity, leading to a more-than-proportionate increase in output.