Similarly marginal product also increases initially and reaches its maximum at point ‘H’. (Stage of Increasing Returns): In this stage, total product increases at an increasing rate from origin … However, this law has vast and universal applicability, and applies in both agriculture and industry sector as well. The Law of Variable Proportions: If one input is variable and all other inputs are fixed the firm’s production function exhibits the law of variable proportions. After that, marginal product begins to decrease. Assumptions of Law of Variable Proportions 1. It is the generalized form of Law of Diminishing marginal return. Suppose land and labour are the only two factors of production. (ii) Units of the variable factor are homogeneous or equally efficient, and are increased one by one. 1, on OX axis, we have measured number of labourers while quantity of product is shown on OY axis. This happens because marginal product of the labour becomes negative. Thus, law of increasing returns operates in industries for a long period. That is why it is called the law of universal application. If the production function is homogeneous with constant returns to scale everywhere, the returns to a single-variable factor will be diminishing. Performance & security by Cloudflare, Please complete the security check to access. The postponement of the law of variable proportions is possible under following conditions: The operation of the law can be postponed in case variable factors techniques of production are improved. An entrepreneur would want to achieve the greatest efficiency possible from the factor for which he is paying, i.e., from factor a. The Law of variable proportion occupies an essential place in economics and is also known as the law of proportionality. With a view of raising agricultural production, labour and capital can be increased to any extent but not the land, being fixed factor. Law of variable proportions is based on following assumptions: The state of technology is assumed to be given and constant. Average product also declines. Some inputs must be kept constant. It is put to optimum use when 4 labourers are employed on it. It is a short-run phenomenon. The Law of Variable Proportions states that, when we increase the quantity of variable input, keeping the other input factors fixed, initially the total output increases at an increasing rate, then increases at a diminishing rate and then finally declines. "If more and more units of a variable factor are employed with fixed factors, total product (TP) increases at diminishing rate and finally starts falling." 2. This is the end of the first stage. TP is total product curve. We should note that marginal product falls at a faster rate than the average product. The Law of Variable Proportion states that as the quantity of a factor is increased while keeping other factors constant, the Total Product (TP) first rises at an incremental rate, then at a decremental rate and lastly the total production begins to fall. In other words, it refers to the input-output relation when output is increased by varying the quantity of one input. Thus, the efficiency of both the fixed and variable factor is decreasing. This law is also known as Law of Proportionality. Machines, raw materials may also become fixed in the short period. Production is the result of the co-operation of all factors. Here, marginal product is negative and total product falls but average product is still positive. The law of variable proportions shows a particular pattern of changes in output and is an explanation of short run production function where some factors remain unchanged. In the short run, when the output of commodities has increased, the … At point ‘G’ i.e., when 7 units of labourers are employed, total product is maximum while, marginal product is zero. This means that the efficiency of the variable factor of production is increasing i.e., output per unit of a is increasing. In short run, input and output relations are studied by keeping at least some factors/ inputs of production constant. Now, suppose we have a land measuring 5 hectares. And a1, a2 , a3….are units of a and b1 b2b3…… are unit of b. Thus, a rational producer will operate in stage II. Thereafter, it begins to diminish corresponding to negative marginal product. We grow wheat on it with the help of variable factor i.e., labour. If the number of units of a variable factor is increased, keeping other factors constant, how output changes is the concern of this law. More units of variable factor, like labour, are needed for its proper utilization. It begins from the point F. In this stage, total product increases at diminishing rate and is at its maximum at point ‘G’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘C’. This law examines the production function with one factor variable, keeping the quantities of other factors fixed. If you are at an office or shared network, you can ask the network administrator to run a scan across the network looking for misconfigured or infected devices. Law of variable proportions occupies an important place in economic theory. The second stage starts from where the first stage ends or where AP=MP. Let us examine the law of variable proportions or the law of diminishing productivity (returns) in some detail. In this law the whole production process … “As the proportion of the factor in a combination of factors is increased after a point, first the marginal and then the average product of that factor will diminish.” Benham, “An increase in some inputs relative to other fixed inputs will in a given state of technology cause output to increase, but after a point the extra output resulting from the same additions of extra inputs will become less and less.” Samuelson, “The law of variable proportion states that if the inputs of one resource is increased by equal increment per unit of time while the inputs of other resources are held constant, total output will increase, but beyond some point the resulting output increases will become smaller and smaller.” Leftwitch. Land, mines, fisheries, and house building etc. Before point ‘I’, average product is less than marginal product. the way the output changes when you increase the number of units of a variable factor. This law applies to the field of production only 5. Obviously, if both resources commanded a price, he would produce somewhere in stage II. Law of Variable Proportions states that as we increase quantity of only one input keeping other inputs fixed, total product (TP) initially increases at an increasing rate, then at … Cloudflare Ray ID: 60afdcf5cf28ca90 Share Your PDF File Law of Variable Proportions: Assumptions, Explanation , Stages , Causes of Applicability and Applicability of the Law of Variable Proportions! This stage begins beyond point ‘G’. Please enable Cookies and reload the page. This means that upto the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. Stage II becomes the relevant and important stage of production. Content Guidelines 2. If on the other hand, a were the free resource, then he would want to employ b to its most efficient point; this is the boundary between stage II and III. However, of the three stages, a firm will like to produce up to any given point in the second stage only. As a result, after a point, marginal product increases less proportionately than increase in the units of labour and capital. ADVERTISEMENTS: 3. Land is a fixed factor whereas labour is a variable factor. According to this law, if additional units of variable inputs are added, keeping the quantities of fixed factors constant, then beyond a certain points, additions to the total product, i.e., the marginal product shall go […] In case of MP: "If quantities of a certain variable factor are increased while quantities of other factors are fixed, MP first … increasing, diminishing and negative returns. In this stage, no firm will produce anything. Accordingly, the proportion between land and labour will be 1: 5. At what place in this stage production takes place would depend upon the relative prices of a and b. DIFFERENCES BETWEEN LAW OF VARIABLE PROPORTION AND RETURNS TO SCALE LAW OF VARIABLE PROPORTION The law of variable proportion is one of the fundamental laws in economics. In Which Stage Rational Decision is Possible: Applicability of the Law of Variable Proportions. After making the optimum use of a fixed factor, then the marginal return of such variable factor begins to diminish. Up to point ‘H’ marginal product increases. It is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative. Thus, the efficiency of the variable factor is falling, while the efficiency of b, the fixed factor, is increasing, since the TP with b1 continues to increase. In other words, it refers to the input-output relation when output is increased by varying the quantity of one input.In this law… The employer will suffer losses by employing more units of labourers. This law deals with the short-run production function. The law explains the production function keeping the one-factor variable and others fixed. Welcome to EconomicsDiscussion.net! The law assumes that factor proportions are variable. The simple reason is that after the optimum use, the ratio of fixed and variable factors become defective. Much time was wasted in this issue. Due to change in the proportion of factors there will also emerge a change in total output at different rates. In this way, the law is equally valid in industries. Mrs. Joan Robinson has put the argument that imperfect substitution of factors is mainly responsible for the operation of the law of diminishing returns. In the short run the volume of production can be changed by altering variable factors only. One factor cannot be used in place of the other factor. • Keeping other factors fixed, the law explains the production function with one factor variable. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. Average product is maximum at point ‘I’ and thereafter it begins to decrease. Law of Variable Proportions occupies an important place in economic theory. For instance, there are two factors of production viz., land and labour. Later on, it begins to diminish and becomes equal to average product at point T. In this stage, marginal product exceeds average product (MP > AP). Before publishing your Articles on this site, please read the following pages: 1. In this stage, average product and marginal product start falling. Initially, law of variable proportion is considered to operate in agriculture production only. 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