145. Returns to scale.

For all the Economics 1B learners - Returns to scale refers to the rate by which output changes if all inputs are changed by the same factor. Let's first look at the law of diminishing returns: https://en.wikipedia.org/wiki/Diminishing_returns

Now - Constant returns to scale: a x-fold change in all inputs leads to a x-fold change in output.

If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). WIKIPEDIA

In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm). The term returns to scale arises in the context of a firm's production function. It explains the behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities.

The laws of returns to scale are a set of three interrelated and sequential laws: Law of Increasing Returns to Scale, Law of Constant Returns to Scale, and Law of Diminishing returns to Scale. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). A firm's production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.

The shape of the PPF (concave to the origin) is also an explanation of the law of diminishing returns and it occurs because not all factor inputs are equally suited to producing all items

. A barrel is more suited to the brewing of beer than the production of bread. Therefore applying it for that function will not affect bread production a lot but greatly contribute to the production of bread - the PPF will therefore be almost vertical if bread is depicted on the x-axis and beer on the y-axis and this production factor is moved from producing bread to beer.

Cash Reserve Ratio(CRR): It refers to the minimum percentage of a bank's total deposits required to be kept with the central bank