Returns to Scale: In defining returns to scale be sure to emphasize that a change in scale involves changing ALL inputs.  A useful analogy is a clone or even a photocopier.  If an entire firm – all dimensions: workers, factories, machines, trucks, managers, etc. – were fed into a copy machine, the result would be a doubling of the scale of the firm.  From there it is easy to ask the key question about what happens to output when this cloning process is complete.

 

There are two details in this section that are worth taking the time to cover carefully.  The first is the description of returns to scale in a Cobb-Douglas production function (Q&A 5.3, p.143), and the second is the presentation of estimates for the Cobb-Douglas parameters given in the Mini-Case on the same page.

 

Finally, even though the cost-side discussion of these issues does not arise until the next chapter, it is a good idea to at least foreshadow the definition of economies of scale when discussing increasing returns to scale.