(a) Indivisible factors of production

These machines, management, labour, finance etc cannot be available in very small sizes, they become available only in certain minimum sizes. When a business unit expands, the returns to scale increase because the indivisible factors are employed to 'the maximum capacity,

(b) Specialization

When the scale of the firm is expanded, there is a wide scope of specialization of labour and requirements. Work can be divided into smaller tasks and workers can concentrate on a narrower range of process. Specialized equipment can be installed. Thus, with specialization efficiency increases leading to increasing returns to scale.

(c) Internal economies of scale    

As the firm expands, it enjoys internal economies of scale. The firm may be in position to install: -better machines, sell its products more easily, borrow money cheaply, procure services of more efficient managers, workers etc. All these economies help in increasing returns to scale more that proportionally.

(d) External economies of scale

When the industry expands, firms within the industry enjoy economies of scale in the form of increased availability of skilled labour force at low costs, improved transport facilities etc. which are shared by all the firms in the industry. These help to increase the production and efficiency of the firm which bring about the increasing returns to scale.

(2) Constant Returns to Scale:

When all inputs are increased by a certain percentage, the output increases by the same percentage, the production function is said to exhibit constant returns to scale. For example, if a firm doubles inputs, it doubles output. The constant scale of production has no effect on average cost per unit produced .

Reasons for constant returns to scale

Increasing returns to scale do not continue indefinitely because as the firm is enlarged further, internal and external economies counter balance by internal and external diseconomies.

(3) Diminishing Returns to Scale:

The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs. For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale, In case of decreasing returns to scale, the firm faces diseconomies of scale, The firm's scale of production leads to higher average cost per unit produced.

Reasons for decreasing returns to scale

 Constant returns to scale is only a passing phase because with this returns to scale start decreasing. The following are the causes of the decreasing phase of returns to scale: