Assumptions of the law
All factor inputs are variable
- A worker works with given tools and implements
- There are no' technological changes in the production process ,
- There is perfect competition in the industry
- The output is measured in physical quantities
Given the assumptions, when all the inputs are . increased in the same proportion and the scale of production is expanded, the effect of output shows three stages.
(1) Increasing Returns to Scale: If the output of a firm increases more than in proportion .to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale.
For example, if the
amount of inputs are doubled and the output increases by more than double, it
is said to be an increasing returns to scale. When there is an increase in the
scale of production, it leads to lower average cost per unit produced as the
firm enjoys economies of scale.