Answer to Question #62623 in Macroeconomics for Ryan

Question

I have a question about the phrase "returns to scale." I understand what increasing or decreasing returns to scale mean in terms of a production function and in terms of isoquants. I am just having trouble breaking down the senses of the actual words in the phrase. It doesn't mean "a scale that is being returned (coming back) to," right? Does it mean something like "returns" as in marginal outputs, when all inputs are increased proportionally? Then what does scale mean here?

Answer 1

"Returns to scale" means how the total output changes when all inputs are increased proportionally. When all inputs are increased proportionally firm works at the new scale of production.