Specialisation and returns to scale

Returns to scale refer to the relation between input requirements and output response and its impact on costs. Economies of scale comprise a number of things, from simple technical scale to phenomena such as processing complex information; direction, control and improvement of independent activities; and experience. If a firm’s output increases in the same proportion as its inputs, then that firm’s technology exhibits constant returns to scale, or, one may say, a firm has constant marginal costs. If a firm’s output increases by a greater proportion than inputs, then this firm’s technology has increasing returns to scale, or it enjoys decreasing marginal costs (or increasing marginal product). If a firm’s output decreases by a smaller proportion than input requirements, then the firm suffers from decreasing returns to scale or increasing marginal costs.