Hi,
Can some one explain me what’s the difference between Diminishing Marginal Returns and Returns to Scale
Correct me if I’m wrong but doesn’t returns to scale simply refer to any type of returns (increasing, decreasing or constant)… while diminishing marginal returns only refers to decreasing returns when using an additional input? So the second terminology is broader than the first terminology.
Edit: I checked and maybe I missed a trick here. I guess diminishing marginal returns also is different from returns to scale in one other key way. Diminishing marginal returns measures what happens when you increase a unit of “only one” required input when you’re already at the optimal level. Returns to scale addresses what happens to output when you increase all the required inputs.
Hi,
As per the Investopedia, below is the difference which mainly focuses on the time horizon, so just wanted to make sure if I understood it correctly that both the terminology are similar and the difference is just about the duration
Key Differences
Though both diminishing marginal returns and returns to scale look at how output changes are affected by changes in input, there are key differences between the two that need to be considered.
Diminishing marginal returns primarily looks at changes in variable inputs and is therefore a short-term metric. Variable inputs are easier to change in a short time horizon when compared to fixed inputs. As such, returns to scale is a measure focused on changing fixed inputs and is therefore a long-term metric.
Both metrics show that an increase in input will increase output up until a point, the main difference between the two is the time horizon and therefore the inputs that can be changed: [variable or fixed]
But returns to scale do not need to be diminishing. This is also a key difference. Some returns increase with scale. Or are constant. Beware using Investopedia for the CFA materials it’s not meant for the CFA level of accuracy.
Hi,
Thanks for clearing my doubt
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Absitively!
CFA Institute commonly uses the version of the Cobb-Douglas production model with constant returns to scale (i.e., when capital and labor both increase by a given percentage, output increases by exactly that percentage; α + β = 1), which implies diminishing marginal returns for each component (capital and labor). However, The Cobb-Douglas model is also consistent with decreasing returns to scale (α + β < 1) and increasing returns to scale (α + β > 1).
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Sha - just an FYI - S2000magician is the closest thing the CFA has to an encyclopedia so I would take this post by him as the answer.
I blush.
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Thanks S2000 and Greybeard 
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My pleasure.