Question

Explain two causes of increasing returns to a variable factor.

Answer 1

When all production components are increased, output rises more quickly, a phenomenon known as increasing returns to scale or falling cost. It implies that the output will grow more quickly than the inputs if all of the inputs are doubled. It is therefore referred to as growing returns to scale.

Numerous factors, including specialisation, labor division, and other external economies of scale, are to blame for this increase.

Figure illustrates a rise in output on the OY axis and an increase in labour and capital on the OX axis. Output rises from P to P_l when labour and capital rise from Q and Q_l, beyond the factors of production, which are labour and capital.