Returns to scale refer to how the output of a production process changes as all inputs are increased proportionally. If output increases by a greater percentage than the increase in inputs, it is called increasing returns to scale. Conversely, if output increases by a smaller percentage, it is termed decreasing returns to scale. This concept is crucial in understanding the efficiency of production. For example, a firm may experience increasing returns to scale when it expands its operations, leading to lower average costs per unit. In contrast, if a firm faces decreasing returns to scale, it may struggle with inefficiencies as it grows.