The relationship between returns to scale and economies or diseconomies of scale
Returns to scale describes how output changes when a firm scales up all its inputs together. This directly determines whether average costs fall, stay flat, or rise as the firm grows.
Formula
Increasing RTS: %ΔOutput > %ΔInputs; Decreasing RTS: %ΔOutput < %ΔInputs
Real World
When Tesla doubled its inputs building Gigafactory Berlin, output more than doubled due to integrated production efficiencies — a clear case of increasing returns to scale lowering average costs.
Exam Focus
Returns to scale is a long-run, all-inputs concept — never apply it to the short run; examiners deduct marks for mixing this with diminishing marginal returns.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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