I love IRS. Not the “Internal Revenue Service” but “increasing returns to scale”.
Understanding the economic concept of “returns to scale” is useful for understanding the tremendous increase in the production of wealth in our modern world.
A bit of vocabulary first. The stuff that goes into production are called “factors of production.” The vocabulary is the same as in basic arithmetic where the product is derived from factors — for instance, the factors 2 and 3 when multiplied yield the product 6.
When you increase the factors, the product increases. That is, the “scale” or the size of the operation increases and therefore the product increases. If the increase in production is proportionate to the increase in the factors, then we have “constant returns to scale.” Continue reading “IRS”