What is the concept of diminishing returns to scale?

1 Answer
May 21, 2015

Diminishing returns to scale happen when you double the use of inputs (K and L) but the output (q) grows less than its double.
For example, a Cobb-Douglas production function: #q=K^0.2L^0.2#
Since #0.2+0.2<1# , the function will have diminishing returns to scale. Consequently, this company will need more than the double of its inputs in order to double the output.
In a graph, the isoquants are more distant from each other. Try plotting this graph with q=2, q=4 and q=6 and you'll see this effect.