Increasing Returns To Scale (IRTS) on the Production Curve

Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Increasing Returns To Scale (IRTS) on the Production Curve Increasing returns to scale (IRTS) is a condition in which a proportional increase in all inputs or factors of production results in a larger proportional increase in output. In the context of the production curve, IRTS occurs when the production curve increases at a faster rate than the increase in inputs or factors of production. Under IRTS conditions, firms can produce more output by increasing the use of proportional inputs or factors of production. For example, if a company doubles inputs or factors of production, the resulting output can more than double. In this case, companies can take advantage of IRTS to increase their production scale and produce more output at lower production costs. However, companies must also consider that there is a limit to IRTS, at which point, an increase in inputs or factors of production no longer results in a commensurate increase in output. This is called diminishing returns to scale (DRTS) or decreasing returns to scale (DRTS). In the context of the production curve, DRTS occurs when the production curve increases at a slower rate than the increase in inputs or factors of production. Under DRTS conditions, companies cannot produce more output by increasing the use of proportional inputs or factors of production. Conversely, companies must increase the use of inputs or factors of production that are greater than proportional to increase output. In this case, the company must consider the trade-off between production costs and the resulting output, and choose the optimal production scale to achieve maximum profitability. Therefore, companies must understand the concept of IRTS and DRTS on the production curve to make the right decisions in managing production and investment. To better understand the concept of IRTS on a production curve, here is an example of using IRTS in production: A food processing plant uses machinery to process raw materials into finished products. If the factory doubles the machines used, then the resulting output will also increase more than doubled. In this case, IRTS occurs because an increase in input (engine) results in a larger than proportional increase in output. In an IRTS situation, the company can scale up production at a lower production cost than the output it produces. Therefore, companies may consider making decisions to increase their production scale by increasing the use of inputs or factors of production that are greater than proportional. However, companies must also consider the limits of IRTS and the likelihood of DRTS occurring at some point. Under DRTS conditions, companies must adjust production scale and use of inputs or factors of production to achieve optimal production and profitability points. In conclusion, IRTS on a production curve is a condition in which a proportional increase in all inputs or factors of production results in a larger proportional increase in output. Companies can take advantage of IRTS to increase their production scale and produce more output at lower production costs. However, companies must also consider the limits of IRTS and the possibility of DRTS occurring at a certain point in order to achieve maximum profitability. To better understand the concept of DRTS on production curves, here is an example of using DRTS in production: A cake factory produces 500 cakes in one day using 10 workers and 2 ovens. If the factory wants to increase production to 700 cakes in one day, it must add workers and ovens. However, when the factory added 5 workers and 1 oven, production only increased to 600 cakes instead of the expected 700 cakes. In this case, DRTS occurs because the increase in inputs (workers and ovens) does not produce a proportional increase in output. Under DRTS conditions, companies must consider the trade-off between production costs and the resulting output. If the company continues to add inputs or factors of production at the same level, production costs will increase while the resulting output is not proportional. Therefore, companies must find optimal points of production and investment, where companies can achieve maximum profitability with efficient production costs. In conclusion, the DRTS on a production curve is a condition in which a proportional increase in all inputs or factors of production results in a smaller proportional increase in output. Companies must consider the trade-off between production costs and the resulting output to achieve optimal production and investment points. Therefore, companies must understand the concept of IRTS and DRTS on the production curve to make the right decisions in managing production and investment.