There are three important reasons for the operation of increasing returns to a factor:

1. Better Utilization of the Fixed Factor:

In the first phase, the supply of the fixed factor (say, land) is too large, whereas variable factors are too few. So, the fixed factor is not fully utilised. When variable factors are increased and combined with fixed factor, then fixed factor is better utilised and output increases at an increasing rate.

2. Increased Efficiency of Variable Factor:

When variable factors are increased and combined with the fixed factor, then former is utilised in a more efficient manner. At the same time, there is greater cooperation and high degree of specialization between different units of the variable factor.

3. Indivisibility of Fixed Factor:

Generally, the fixed factors which are combined with variable factors are indivisible. Such factors cannot be divided into smaller units. Once an investment is made in an indivisible fixed factor, then addition of more and more units of variable factor, improves the utilisation of fixed factor. The increasing returns apply as long as optimum level of combination between variable and fixed factor is achieved.