Question

What do you mean by 'long-run' in production? Explain the laws of returns to scale.

Hint:

In the long run, firms can adjust all inputs, and the laws of returns to scale describe how output changes with proportionate changes in all inputs.

Answer 1

The 'long-run' in production refers to a time period in which all factors of production can be varied, unlike the short-run where only some factors are fixed. In the long run, firms can adjust their scale of operations and production capacity. 

Laws of Returns to Scale: The laws of returns to scale explain how output changes when all inputs are increased proportionally. The three stages of returns to scale are: \[\begin{array}{rl} \bullet & \text{Increasing Returns to Scale: When output increases by a larger proportion than the increase in inputs.} \\ \bullet & \text{Constant Returns to Scale: When output increases in the same proportion as the increase in inputs.} \\ \bullet & \text{Decreasing Returns to Scale: When output increases by a smaller proportion than the increase in inputs.} \\ \end{array}\] 

Diagram Explanation: A graph showing increasing, constant, and decreasing returns to scale can be used to illustrate this.