Decreasing Returns to Scale
If increasing all of the inputs being used for production by a certain percentage increases the amount of total output by a lesser percentage than the increase in inputs, this is a case of decreasing returns to scale.
(Dwayne Benjamin, Toronto PPG 1002H)
This case is unusual due to the possibility of replication. If all of a firm’s inputs are doubled, it should at least be able to replicate what it was doing before. Decreasing returns to scale usually appear to occur because of a failure to consider some one of the inputs of production. If we have twice as much of every input except for one, we can’t replicate exactly what we were doing before.
Definition prepared by students at the University of Toronto School of Public Policy and Governance and edited by Ben Eisen.