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What are the causes for the operation of the law of increasing returns?

What are the causes for the operation of the law of increasing returns?

Solution

Increasing returns here refers to Stage I of the law of variable proportions, where total output rises at an increasing rate as more of the variable input is added to fixed inputs; its causes are:

  1. Underused fixed factors: at first the fixed factors are excess/underutilised, so adding the variable factor uses them more fully and output jumps.
  2. Division of labour and specialisation: more variable input allows tasks to be divided, raising productivity.
  3. Indivisibility of fixed factors: indivisible fixed factors start being used efficiently only as the variable input grows.
  4. Relative scarcity of the variable factor initially: the variable factor is scarce relative to the fixed factor at the start, so each added unit is highly productive.

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