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Production Function
Production function highlights the association between the quantity of output and the quantities of several inputs used for the production.
12.1 The Law of Diminishing Returns or the Law of Variable Proportion
The Law states that if one factor of production such as land or capital is increased and the other factors are kept fixed, then the marginal product of that factor will ultimately fall. In other words, upto particular amount of variable factor, marginal product of the factor may rise but after some point it starts decreasing and if the variable still increases then the marginal product can even become negative.
12.2 Returns to Scale
Returns to Scale implies the impact of change in the scale of production on the amount of output. The returns to scales are basically of three types:
• Increasing returns to scale
• Constant returns to scale
• Diminishing or Decreasing returns to scale
12.3 Economies and Diseconomies of Scale
Economies of scale refer to the advantages that the manufacturer derives by intensifying its scale of production.
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On the other hand, internal and external diseconomies of scale refer to the disadvantages accruing to the firm due to large scale production.
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