Returns to scale Totally Explained

Everything about Returns To Scale totally explained

In economics, returns to scale and economies of scale are related terms that describe what happens as the scale of production increases. They are different terms and are not to be used interchangeably.

Returns to scale

Returns to scale refers to a technical property of production that examines changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant). If output increases by that same proportional change then there are constant returns to scale (CRTS), sometimes referred to simply as returns to scale. If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)
   Short example: Where all inputs increase by a factor of 2, new values for output should be:
Twice the previous output given = a constant return to scale (CRTS)
   Less than twice the previous output given = a decreased return to scale (DRS)
   More than twice previous output given = an increased return to scale (IRS)

Economies of scale

Economies of scale and diseconomies of scale refer to an economic property of production that affects cost if quantity of all input factors are increased by some amount. If costs increase proportionately, there are no economies of scale; if costs increase by a greater amount, there are diseconomies of scale; if costs increase by a lesser amount, there are positive economies of scale. When combined, economies of scale and diseconomies of scale lead to ideal firm size theory, which states that per-unit costs decrease until they reach a certain minimum, then increase as the firm size increases further.
Economies of scale refers to the decreased per unit cost as output increases. More clearly, the initial investment of capital is diffused (spread) over an increasing number of units of output, and therefore, the marginal cost of producing a good or service decreases as production increases (note that this is only in an industry that's experiencing economies of scale)
An example will clarify. AFC is average fixed cost If a company is currently in a situation with economies of scale, for instance, electricity, then as their initial investment of $1000 is spread over 100 customers, their AFC is

left (frac=aF(K,L)

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