RETURNS TO SCALE

Disclaimer: Let me be less existential. This blog is for all those people out there who need to understand microeconomics concepts and yet do not want to seriously analyze technical books/websites/professors. I AM NOT A NERD who writes this stuff for no reason! Mind you, there are life musings under the thorough explanation of the concept, just in case you want to see how it applies to the REAL, non-earthly, non-financial aspects of life. :)

Sometimes, when we have a business that is doing well, we want to expand it and take it to the next level. For example, if you are earning a lot from selling lemonade outside your house (which only happens in cartoons or in lemonadestandgame.com and definitely not in the Philippines), you dream about getting more profits by having stalls in bazaars, malls, or other people’s front yard. You want to expand your lemonade business, produce more glasses of lemonade to sell, penetrate untapped markets (make it known to the lemonade drinkers who haven’t heard about it), and possibly employ more people to make lemonades for you. Obviously, doing all these will require you to invest more money in the business. The RETURNS TO SCALE concept shows how much output responds to an aggregate increase in the inputs. WHOA. What does that mean? Sometimes, you can invest this much input or investment and not get an equivalent output or result. There are three possible situations:

*Let us assume that (1) original investment is P100. Doubling it means you’ll add another P100, possibly as payment/salary for an additional person who will squeeze the lemons). Your total input is now P200. And (2) given your P100 original investment, your original output is 10 glasses of lemonade.

1. CONSTANT: When the input is doubled, the output will also double.
Adding P100 investment, you will be able to produce 10 additional glasses of lemonade

2. DECREASING: When the input is doubled, the output will less than double.
Adding P100 investment, you will be able to produce less than 10 additional glasses of lemonade

3. INCREASING: When the input is doubled, the output will more than double.
Adding P100 investment, you will be able to produce more than 10 additional glasses of lemonade

So, why does this happen? For constant, well, you simply sow what you reap. For decreasing, your business gets more expensive as it grows. You may have to buy expensive electrical appliances to be able to squeeze more lemons, or you might have to pay rent for your stall space (which didn’t exist before because you were just in your front yard). For increasing, you are able to make more out of what you invest. Possibly because of the bigger quantity of lemons, your local suki will give you a quantity discount. Or maybe because your employees are more specialized (one will squeeze lemons, another will mix it with water and sugar), the job is done faster and more efficiently!

Depending on its nature, each business falls in one of those categories.

Let’s relate it to life. Our life is our business, our efforts is our input, and the result of that effort is the output. Here’s my story...

In high school, I remember one of my classmates telling me that I was such an overachiever. I accepted it as a compliment and was quite pleased. After a while (when I was already reflecting on the day’s happenings), I was not so sure if it was meant to be a praise or not.

OVERACHIEVER: Is it a compliment or not? At times yes and at times no. So which was it?

I don’t remember the context so well, but I have a feeling that she meant it as a non-compliment. I think she meant to say that given my skills, talents and resources, I am achieving more than I am supposed to. In other words, I am attaining more than what I deserve to attain. I would associate this with the economic concept, the RETURNS TO SCALE.

Given this analogy, my friend places me in the increasing returns to scale. Although it is quite pleasing that she sees me as effortless yet achieving (hahaha, KAPAL ko! so... I'm simply lucky), it’s not so nice to know that she thinks that my being should not have merited my accomplishments. Oh well, there’s nothing I can do now. WAHAHA!

I would rather be an overachiever and accomplish a lot of things even though I might not have deserved it, rather than be an underachiever and have so much potential that remains unleashed. I guess there are times when we’ve already put our heart, mind, and body into it, and yet it’s not enough. There are also times when we did not exert so much, and yet we’re able to wing it. And sometimes, we get what we’ve worked for. We have no control over these things.

Some people are just lucky. Some people are not so lucky. Some people are normal.

Life is not very predictable. Sometimes, the quality of you effort is not the same as your outcome. Sometimes, it is. And in a few instances, we get more.

REPLY WITH YOUR ANSWER TO THIS:

Would you rather have life consistent—you just get what you worked for?
Or would you rather have it random—constant, increasing, or decreasing?

Alexis Ventura
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