Question

Law of diminishing returns to a factor is compatible with the law of increasing returns to scale. Do you agree? Explain.

Answer 1

Yes, I agree that the law of growing returns to scale and the law of diminishing returns to a factor are compatible.

1. Law of Diminishing Returns to a Factor (Short Run):
   • Functions by increasing one input (such as labour) while maintaining fixed levels of other inputs (such as capital).
   • The variable factor's marginal product eventually begins to decline.
   • For example, when you add more workers to the same number of machines, the additional output from each new employee begins to decline.
2. Law of Increasing Returns to Scale (Long Run):
   • Functions when the same proportion of increases are made to all inputs (labour, capital, etc.).
   • The rise in output is more than proportionate.
   • Example: Doubling both labour and machines leads to more than twice as much output because of improved division of labour, coordination, etc. 

A firm may face diminishing returns to labour in the short run but still achieve increasing returns to scale in the long run by expanding all inputs.