The law of returns to scale operates in the longrun. It states that when all factor inputs are increased, output may increase at an increasing rate (increasing returns to scale), later at a constant rate (constant returns to scale) and finally at a diminishing rate (decreasing returns to scale).

Figure 2.22 Increasing returns to scale.

Capital	Labour	Output
4 8 16	2 4 8	12 32 76

From the above it can be seen that increasing returns to scale occur if output more than doubles when factor inputs double.

Figure 2.23 Constant returns to scale

Capital            labour              output

4                      2                      12

8                      4                      24

16                    8                      48

With constant returns to scale, output increases at the same rate with an increase in factor inputs i.e. when inputs double, output also just doubles.

Figure 2.24 Decreasing returns to scale

Capital            labour              output

4                      2                      12

8                      4                      18

16                    8                      32

 

Decreasing returns to scale occur when output less than doubles after factor inputs have doubled. This represents diseconomies of scale while increasing returns to scale represent economies of scale.