In Fig. 8.8, the scale line OS as usual shows how additional output can be produced by increasing the quantity of both the factor units. There is a tendency of increasing returns to scale upto a certain stage. This is reflected in the decrease in the gap between isoquants IQ1, IQ2 and IQ3 along the scale line (AB > BC > CD).
After this, increasing returns to scale give place to constant returns to scale, indicated by equal distances between isoquants IQ3 IQ4 and IQ5 along the scale line (CD = DE = EF). Finally, the gaps between isoquants IQ5, IQ6 and IQ7 widen along the scale line (EF < FG < GH), showing diminishing returns to scale.
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Similar pattern is observed along the proportions line PP corresponding to three distinct stages of the law of variable proportions. The gap between the succeeding isoquants along the proportions line first falls then rises.
In other words, in the initial stages, lesser and lesser increase in the quantities of labour (with fixed quantity of capital) is required for every additional unit increase in output. But, ultimately larger and larger quantities of labour are required to be combined with a fixed quantity of capital to produce additional units of output.
It is important to note that there in only one least cost combination of the long- run, represented by point ‘G’ in Fig. 8.7, which is also the least cost combination of the short-run. At this point, cost in the long-run (long-run total cost) equals cost in the short-run (short-run total cost). For all other output levels, short-run total cost exceeds long-run total cost. This fact can be verified by drawing the isocost lines through points ‘A’, ‘B’, ‘C’ ‘D’, ‘E’, ‘F’ and ‘G’.