The following points highlight the two main factors giving rise to increasing return to scale.
The factors are: 1. Indivisibilities of the factors of production 2. Specialisation of factor of production.
Factor # 1. Indivisibilities of the factors of production:
There are some factors of production which are purchase in some fixed quantity and cannot be divided into small pieces; such factors of production are described as indivisible factors.
This indivisibility of factor of production is an advantage to the firm producing on a large scale.
By increasing production the cost of production goes on decreasing. Indivisibility is specially found in case of men and machines.
The machines have a minimum size whatever may be the level of out-put, the minimum size has to be employed. Naturally, with increasing output the cost of production will decline and the firm will reap the benefits of increasing return to scale.
(a) Marketing Indivisibilities:
These relates to the employment of salesmen, maintenance of purchase, department and advertisement. The larger the scale of production less will be the per unit cost.
(b) Financial Indivisibilities:
These relate to the managing costs of loans securities issued in large quantities can be listed in the stock exchange where-as the smaller quantities will increase the cost.
(c) Research Indivisibilities:
The research and innovation department need some bare essential sum of money on men and material needed for research projects, less than that of research cannot be carried on. Thus, there are Critical minimum efforts needed to carry on the production job irrespective of the scale of production. With the increase in the scale of production the cost of production declines which give rise to the Laws of Increasing Return to scale.
Factor # 2. Specialisation of factor of production:
The second major reason for the operation of Law of Increasing Return to scale is the specialisation of the factor of production and division of labour. These results in greater production or increasing return to scale. The concept of division of labour and specialisation can be extended to the organisation.
Each manager specialises in his work resulting in increasing return to scale. Apart from the above two major factors the other important constituents of Law of Increasing Return to scale is the economies of large scale production i.e., internal and external economies of scale.