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Return

A set of properties that characterize returns in productive activities.

Increasing Return

Increasing returns, also known as economies of scale, occur when a proportional increase in inputs leads to a more than proportional increase in output. In other words, as the scale of production expands, the average cost per unit of output decreases. This can result from factors such as specialization, efficient use of resources, and spreading fixed costs over a larger output.

Increasing returns, also known as economies of scale, refer to a situation where a firm’s output rises more than proportionally to its inputs as it expands its production scale. In other words, as a firm produces more units of a product, the cost of producing each unit tends to decrease.

There are several reasons why increasing returns may occur. One reason is that as a firm increases its production volume, it can use economies of scale. For example, it may be able to purchase raw materials in bulk, spread fixed costs over more units, or use more efficient production processes. These factors can lead to lower costs per output unit, allowing the firm to produce more units at a lower cost.

Another reason why increasing returns may occur is due to network effects. For example, a social media platform may become more valuable to users as more users join the platform. This can create a positive feedback loop where more users lead to more value for existing users, attracting even more users.

Increasing returns can have important implications for industries and the economy. Growing returns may lead to the dominance of a few large firms in a particular sector, as smaller firms cannot compete with the lower costs of larger firms. On the other hand, increasing returns may also create opportunities for new entrants to disrupt established firms by introducing innovative products or processes that take advantage of increasing returns.

Decreasing Return

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References

  • Economies of Scope
  • Romer, Paul M. "Increasing returns and long-run growth." Journal of political economy 94.5 (1986): 1002-1037.
  • Arthur, W.B. (1989). Competing technologies, increasing returns, and lock-in by historical events. The Economic Journal, 99(394), 116-131.
  • Benhabib, J., & Farmer, R. E. (1994). Indeterminacy and increasing returns. Journal of economic theory, 63(1), 19-41.