There is a distinction between Return and Revenue.
Return is the physical productivity the manager is getting from the employment
of particular factors of production into the existing production process. On
the other hand Revenue is the money income which the manager is getting from
the sale of different units of product in the market. In return analysis we get
different laws of return, i.e., law of increasing return, law of constant
return and law of diminishing return. In case of increasing return we observe
that rate of increase in output is always more than the rate of increase in
input. In case of law of constant return we observe the situation where rate of
increase in output is identical with rate of increase in input. In case of law
of diminishing return we observe the situation where rate of increase in output
is always less than the rate of increase in input. Output is reflected from the
productivity of the factors of production and therefore it is accepted as
Asset. On the other hand input is the employment of factors of production, i.e.,
Land, Labour and Capital and therefore input is accepted as the liability of
the management. In the return analysis we get the existence of different
types of Return To Scale, i.e., (i) Increase in Return To Scale, (ii) Constant
Return To Scale, and (iii) Diminishing Return To Scale.
Each Return To Scale and its behavior are explained as
follows:
(i) Increase in Return To Scale
When the manager is employing continuously one
particular factor of production keeping other factors of production constant
into the existing production process, we observe that in this situation Total
Return which is the Total Utility Productivity the manager is getting from
the employment of total factors of production increases at an increasing
rate. Therefore in this situation marginal return, which is the
addition of productivity which the manager is getting from the employment of
one more additional unit of factor of production, goes on increasing.
(ii) Constant Return To Scale
In this return to scale we observe that the rate of
increase in output is equal to the rate of increase in input. In the case of
constant return to scale it is observed that the manager is employing
continuously one particular factor of production keeping other factors of
production constant into the existing production process, we observe that in
this situation Total Return which is the Total Productivity the manager
is getting from the employment of total factors of production increases at a
constant rate. Consequently, in this situation marginal return,
which is the additional productivity the manager is getting from the employment
of one more additional unit of factor of production, becomes identical.
(iii) Diminishing Return To Scale
In this phase of production we observe the existence
of law of diminishing return where the manager observes that rate of
increase in output is always less than rate of increase in input. Therefore,
this is a very critical stage of production. Output is reflected from the
productivity of the factors of production; whereas input is employing the
employment of factors of production, i.e., land, labor and capital in the
existing production process. Therefore, in the law of diminishing return, we
get that, rate of increase in output or asset is always less than rate of
increase in input in liability.
The concept of diminishing return to scale is derived
from the law of diminishing return. In this production phase, it is observed
that the manager is employing continuously one particular factor of production
keeping other factors of production constant in the existing production
process. It is observed that, in these situation total return increases but at
a diminishing rate. Therefore in this situation, we get the marginal return
which is additional productivity the manager is getting from the employment of
one more additional unit of factor of production goes on diminishing.
It is finally observed that the law of diminishing
return to scale is a very critical stage of production as in this state we
observe that the marginal productivity parameter is always diminishing. Therefore
in this particular stage of production, the manager has to take effective steps
in order to get either constant marginal return or increase in marginal return
in order to increase the level of efficiency of the firm.