Question

Mention two causes of increasing returns to a factor.

Explain two causes of increasing returns to a factor.

Answer 1

Two causes of increasing returns to a factor:

1. Fuller Utilisation of Fixed Factors: Fixed factors like machines are generally indivisible and remain underutilised when fewer variable factors (like labour) are used. As more workers are added, these fixed factors are used more efficiently. For example, if five machines are available but only one worker is employed, four machines remain idle. When more workers are added, the machines are better utilised, leading to higher productivity and increasing returns.
2. Increase in Efficiency: When more units of the variable factor (labour) are employed, work can be divided according to skill and ability. This results in specialisation, improved coordination, and higher efficiency of labour, which increases the marginal product and causes increasing returns to a factor.