Constant Returns To Scale

Published Dec 27, 2022

Definition of Constant Returns to Scale

Constant Returns to Scale (CRS) is an economic concept that describes a situation in which the output of a production process increases proportionally with the inputs. That means if the inputs are doubled, the output will also double. This is in contrast to increasing returns to scale (IRS) and decreasing returns to scale (DRS).

Example

To illustrate this, let’s look at a small bakery. The bakery produces cakes and cookies and has two employees, a baker, and a decorator. The baker is responsible for mixing the ingredients and baking the cakes and cookies, while the decorator is responsible for decorating them. The bakery produces 100 cakes and 200 cookies per day with these two employees.

Now, let’s assume the bakery decides to double the number of employees to four. In this case, the bakery would expect to produce twice as many cakes and cookies (i.e., 200 cakes and 400 cookies). This is an example of constant returns to scale because the output has increased proportionally with the inputs.

Why Constant Returns to Scale Matters

Constant returns to scale is a helpful concept for understanding the behavior of firms in the long run. It shows that if a firm increases its inputs, it can expect to increase its output proportionally. This is important for firms that are looking to expand their production capacity. It also helps firms to determine the optimal size of their production process.

In addition, constant returns to scale can also be used to analyze the effects of economies of scale. That means it can be used to determine the point at which a firm can expect to achieve cost savings due to increased production. This is important for firms that are looking to maximize their profits in the long run.