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  • Returns To Scale

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    mehak
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    Returns to scale describes how a firm's output changes as total inputs change. There are three types: increasing returns (output increases more than inputs), constant returns (output increases proportionally with inputs), and decreasing returns (output increases less than inputs). The document analyzes four major IT companies over 10 years, using the Cobb-Douglas production function to determine their returns to scale through regression analysis. It finds the output elasticity is less than 1, indicating decreasing returns to scale as the sector has witnessed higher input growth than output growth.

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    Returns to scale describes how a firm's output changes as total inputs change. There are three types: increasing returns (output increases more than inputs), constant returns (output increases proportionally with inputs), and decreasing returns (output increases less than inputs). The document analyzes four major IT companies over 10 years, using the Cobb-Douglas production function to determine their returns to scale through regression analysis. It finds the output elasticity is less than 1, indicating decreasing returns to scale as the sector has witnessed higher input growth than output growth.

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    13 views2 pages

    Returns To Scale

    Uploaded by

    mehak
    Returns to scale describes how a firm's output changes as total inputs change. There are three types: increasing returns (output increases more than inputs), constant returns (output increases proportionally with inputs), and decreasing returns (output increases less than inputs). The document analyzes four major IT companies over 10 years, using the Cobb-Douglas production function to determine their returns to scale through regression analysis. It finds the output elasticity is less than 1, indicating decreasing returns to scale as the sector has witnessed higher input growth than output growth.

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    Returns to Scale

    Returns to scale is a concept that tries to explain the behaviour of the output in relation to the change in the total scale of operations of the firm. A change of scale of operations means a change in the total size of the firm, i.e. a change in both labour and capital of the firm. For determining the returns to scale, we need to calculate the Output Elasticity where: Output Elasticity = % change in Output/% change in all inputs

    The different types of returns to scales are: 1. a) Increasing Returns to scale: Here the % change in the output is higher than the % change in Inputs. In other words, the Output Elasticity is greater than 1.

    1. b) Constant Returns to Scale: This occurs when the % change in the output is equal to the % change in Inputs. In other words, the Output Elasticity is equal to 1.

    1. c) Decreasing Returns to Scale: It happens when the % change in the output is lower than the % change in Inputs. In other words, the Output Elasticity is less than 1.

    In this assignment, we studied the four major companies of the Information Technology industry in terms of their cost of goods sold, their capital expenditure and their labour expenditure for the past 10 years. After that we ran a regression test so as to find out if the industry has received increasing or decreasing or negative returns to scale. Cobb-Douglas production function Q= a*(L^b)*(K*c) where Q= output, L= labour, K= Capital and b+c= 1 and if b+c=1 Constant returns to scale b+c>1..Increasing returns to scale b+c<1..Decreasing returns to scale

    Applying log on both sides, lnQ= lna + b*lnL + c*lnK From the regression test, we found out that c= 0.441433587 and b= 0.513607436 And b+c= 0.955041022 Since b+c<1, we conclude that the sector has witnessed a Decreasing returns to scale.

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