In the long- run, there is no fixed

factor; all factors are variable. The laws of returns to scale explain the relationship between output and the scale of inputs in the long-run when all the inputs are increased in the same proportion.

**Assumptions:**

Laws of Returns to Scale are based on the

following assumptions.

*All the factors of production (such as land, labour and capital) are variable but organization is fixed.

*There is no change in technology.

*There is perfect competition in the market.

*Outputs or returns are measured in physical quantities.

**Three Phases of Returns to Scale:**

(1) Increasing Returns to Scale:

In this case if all inputs are increased

by one per cent, output increase by more than one per cent.

(2) Constant Returns to Scale:

In this case if all inputs are increased

by one per cen, output increases exactly by one per cent.

(3) Diminishing Returns to Scale:

In this case if all inputs are increased

by one per cent, output increases by less than one per cent.

**Diagrammatic Illustration:**

The three laws of returns to scale can be explained with the help of the diagram

below.

In the diagram 3.2, the movement

from point a to point b represents

increasing returns to scale. Because,between these two points output has doubled, but output has tripled.The law of constant returns toscale is implied by the movement from the point b to point c. Because, between these two points inputs have doubled and output also has doubled. Decreasing returns to scale are denoted by the movement from the point c to point d since doubling the factors from

4 units to 8 units produce less than the

increase in inputs, that is, by only 33.33%.