The law of increasing returns is the opposite of the legislation of decreasing returns. Wherein the legislation of diminishing return operates, every additional investment the capital and labour yields much less than proportionate returns.

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But, in the situation of the regulation of raising returns, the return is more than proportionate.

The law deserve to be express in terms of prices too:

Increasing returns average lower costs per unit simply as diminishing return mean greater costs. Thus, the legislation f of raising return signifies that price per unit that the marginal or added output falls with the growth of one industry. As an ext and an ext units of the commodity room produced, the cost per unit go on steadily falling.

While pointing out the regulation of diminishing returns, the was stated that the regulation operated since of the dearth or scarcity that one or more essential components of production. Some factors cannot be boosted while other factors are increased.

The result is a defective mix of factors. Over there are, however, some sectors where all components required are available at any kind of moment and also in any kind of amount. Hence, at any time a mix of the factors becomes unbalanced, it can be collection right. Together a consequence, the regulation of enhancing returns will run in such industries instead that the regulation of diminishing returns.

The law of increasing returns operates just up to the optimum point, i.e., the suggest of maximum return. Together a company expands and moves towards the optimum, the return every unit goes on increasing, i.e., the price of production is falling. If, however, the service is expanded beyond the optimum point, the profits will begin to decline, and the regulation of diminishing returns begins to operate. The law of enhancing returns may then be declared as under:

“As the ratio of one aspect in a combination of components is increased, approximately a point, the marginal product that the element will increase.” The phrase ‘up come a point’ may be carefully noted- The raising returns will be only up come a point. Later, the return might diminish. Intend a fractional pen manufacturer invests successive doses of Rs. 1,000 every in the production of pens and also the results are as given in the schedule below:


This table renders it clear that together the manufacturer goes on enlarging his organization by investing successive quantities of Rs. 1,000 each, the full output walk on increasing (column 2), the expense of production per pen goes on falling (column 3), and also the marginal or additional output of each extra sheep of Rs. 1,000 go on enhancing (column 4).

Diagrammatic Representation:

We can display the above an outcome with the help of a diagram also (Fig. 22.4). The diagram below shows the decreasing price shown in tower 3 above.


Along OX are measured the full quantity of pen manufactured, and also along OY the cost of manufacturing per pen. IR is the cost curve. That is clear that, as the range of production increases, the price per unit falls.

Why the law of raising Returns Operates in Industry:

The regulation of increasing returns generally applies to production industries. Right here man is no hampered by nature. The goes ahead and benefits from all sorts the economies, both internal and external. We have currently discussed the economic climates of large production. They room all accessible to a large manu­facturer. Together he increases the scale, manufacturing becomes much more and an ext economical. The expense of manufacturing falls, which method an increasing return.

Why go me law operate in large manufacturing industries?

There space several reasons on account of i m sorry the legislation of raising returns operates in manufactures:

(i) there is a big scope because that the introduction of machinery. What is much more important is that it can be kept repeatedly at work. The an outcome is that resources costs every unit of output are less.

(ii) there is ample scope for the usage of specialised labour. The result is a big output, which way lowering of costs. This means increasing returns.

(iii) The manufacturing industries, being typically on a huge scale, space able come realise economic climates of scale, both internal and also external. These economies relate come buying and selling, economy in administration, publicity and also salesman­ship, benefit of research and also experiments, financial, technical and managerial economies, etc.

(iv) unlike agriculture, disruptions in work from organic disturbances, like alters in weather and also seasons, are on a young scale. For this reason there are no costly breakdowns. Manufacturing is smooth and economical, which way increasing returns.

(v) The work are brought on within a small area so the supervision is easy and effective. There is small waste the materials and also spoiling of machinery. Professional guidance and also advice are constantly at hand. Hence production is lugged on economically.

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It is on account of all these reasons that the regulation of increasing returns operates in industry. However the service cannot go on expanding itself indefinitely. Over there comes a time when economies change into diseconomies together the business becomes unwieldy.

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