ECN 001 (Online Discussion Quiz 1—–10th May 2021)

Law of Variable Proportions occupies an important place in economic theory.
This law is also known as Law of Proportionality.
Keeping other factors fixed, the law explains the production function with one factor variable. In the short run when output of a commodity is sought to be increased, the law of variable proportions comes into operation.
Therefore, when the number of one factor is increased or decreased, while other factors are constant, the proportion between the factors is altered. For instance, there are two factors of production viz., land and labour.

Land is a fixed factor whereas labour is a variable factor. Now, suppose we have a land measuring 5 hectares. We grow wheat on it with the help of variable factor i.e., labour. Accordingly, the proportion between land and labour will be 1: 5. If the number of laborers is increased to 2, the new proportion between labour and land will be 2: 5. Due to change in the proportion of factors there will also emerge a change in total output at different rates. This tendency in the theory of production called the Law of Variable Proportion.

Definitions:
“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

THE BASIC ASSUMPTION
Law of variable proportions is based on following assumptions:
(i) Constant Technology:
The state of technology is assumed to be given and constant. If there is an improvement in technology the production function will move upward.
(ii) Factor Proportions are Variable:
The law assumes that factor proportions are variable. If factors of production are to be combined in a fixed proportion, the law has no validity.
(iii) Homogeneous Factor Units:
The units of variable factor are homogeneous. Each unit is identical in quality and amount with every other unit.
(iv) Short-Run:
The law operates in the short-run when it is not possible to vary all factor inputs.

Explanation of the Law:
In order to understand the law of variable proportions we take the example of agriculture. Suppose land and labour are the only two factors of production.By keeping land as a fixed factor, the production of variable factor i.e., labour can be shown with the help of the following table:

Variable Factor of Production

From the table 1 it is clear that there are three stages of the law of variable proportion. In the first stage average production increases as there are more and more doses of labour and capital employed with fixed factors (land). We see that total product, average product, and marginal product increases but average product and marginal product increases up to 40 units. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. This is the end of the first stage.

The second stage starts from where the first stage ends or where AP=MP. In this stage, average product and marginal product start falling. We should note that marginal product falls at a faster rate than the average product. Here, total product increases at a diminishing rate. It is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative.

The third stage begins where second stage ends. This starts from 8th unit. Here, marginal product is negative and total product falls but average product is still positive. At this stage, any additional dose leads to positive nuisance because additional dose leads to negative marginal product.

Graphic Presentation:
In fig. 1, on OX axis, we have measured number of labourers while quantity of product is shown on OY axis. TP is total product curve. Up to point ‘E’, total product is increasing at increasing rate. Between points E and G it is increasing at the decreasing rate. Here marginal product has started falling. At point ‘G’ i.e., when 7 units of labourers are employed, total product is maximum while, marginal product is zero. Thereafter, it begins to diminish corresponding to negative marginal product. In the lower part of the figure MP is marginal product curve.

Graphical Presentation of Variable Factor of Production

Up to point ‘H’ marginal product increases. At point ‘H’, i.e., when 3 units of labourers are employed, it is maximum. After that, marginal product begins to decrease. Before point ‘I’ marginal product becomes zero at point C and it turns negative. AP curve represents average product. Before point ‘I’, average product is less than marginal product. At point ‘I’ average product is maximum. Up to point T, average product increases but after that it starts to diminish.

Three Stages of the Law:
1. First Stage:
First stage starts from point ‘O’ and ends up to point F. At point F average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate up to point E. between ‘E’ and ‘F’ it increases at diminishing rate. Similarly marginal product also increases initially and reaches its maximum at point ‘H’. 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).

2. Second Stage:
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’. Average product is maximum at point ‘I’ and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP < AP).

3. Third Stage:
This stage begins beyond point ‘G’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. Law of diminishing returns firmly manifests itself. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only.

Three Stages of Law of Production Function

In Which Stage Rational Decision is Possible:
To make the things simple, let us suppose that, a is variable factor and b is the fixed factor. And a1, a2 , a3….are units of a and b1 b2b3…… are unit of b.

Stage I is characterized by increasing AP, so that the total product must also be increasing. This means that the efficiency of the variable factor of production is increasing i.e., output per unit of a is increasing. The efficiency of b, the fixed factor, is also increasing, since the total product with b1 is increasing.

The stage II is characterized by decreasing AP and a decreasing MP, but with MP not 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.
Finally, stage III is characterized by falling AP and MP, and further by negative MP. Thus, the efficiency of both the fixed and variable factor is decreasing.

Rational Decision:
Stage II becomes the relevant and important stage of production. Production will not take place in either of the other two stages. It means production will not take place in stage III and stage I. Thus, a rational producer will operate in stage II.

Suppose b were a free resource; i.e., it commanded no price. An entrepreneur would want to achieve the greatest efficiency possible from the factor for which he is paying, i.e., from factor a. Thus, he would want to produce where AP is maximum or at the boundary between stage I and II.

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.

Obviously, if both resources commanded a price, he would produce somewhere in stage II. At what place in this stage production takes place would depend upon the relative prices of a and b.

CONDITION OR CAUSES OF APPLICABILITY
There are many causes which are responsible for the application of the law of variable proportions.
They are as follows:
1. Under Utilization of Fixed Factor:
In initial stage of production, fixed factors of production like land or machine, is under-utilized. More units of variable factor, like labour, are needed for its proper utilization. As a result of employment of additional units of variable factors there is proper utilization of fixed factor. In short, increasing returns to a factor begins to manifest itself in the first stage.

2. Fixed Factors of Production.
The foremost cause of the operation of this law is that some of the factors of production are fixed during the short period. When the fixed factor is used with variable factor, then its ratio compared to variable factor falls. Production is the result of the co-operation of all factors. When an additional unit of a variable factor has to produce with the help of relatively fixed factor, then the marginal return of variable factor begins to decline.

3. Optimum Production:
After making the optimum use of a fixed factor, then the marginal return of such variable factor begins to diminish. The simple reason is that after the optimum use, the ratio of fixed and variable factors become defective. Let us suppose a machine is a fixed factor of production. It is put to optimum use when 4 labourers are employed on it. If 5 labourers are put on it, then total production increases very little and the marginal product diminishes.

4. Imperfect Substitutes:
Mrs. Joan Robinson has put the argument that imperfect substitution of factors is mainly responsible for the operation of the law of diminishing returns. One factor cannot be used in place of the other factor. After optimum use of fixed factors, variable factors are increased and the amount of fixed factor could be increased by its substitutes.

Such a substitution would increase the production in the same proportion as earlier. But in real practice factors are imperfect substitutes. However, after the optimum use of a fixed factor, it cannot be substituted by another factor.

Applicability of the Law of Variable Proportions:
The law of variable proportions is universal as it applies to all fields of production. This law applies to any field of production where some factors are fixed and others are variable. That is why it is called the law of universal application.
The main cause of application of this law is the fixity of any one factor. Land, mines, fisheries, and house building etc. are not the only examples of fixed factors. Machines, raw materials may also become fixed in the short period. Therefore, this law holds good in all activities of production etc. agriculture, mining, manufacturing industries.

1. Application to Agriculture:
With a view of raising agricultural production, labour and capital can be increased to any extent but not the land, being fixed factor. Thus when more and more units of variable factors like labour and capital are applied to a fixed factor then their marginal product starts to diminish and this law becomes operative.

2. Application to Industries:
In order to increase production of manufactured goods, factors of production has to be increased. It can be increased as desired for a long period, being variable factors. Thus, law of increasing returns operates in industries for a long period. But, this situation arises when additional units of labour, capital and enterprise are of inferior quality or are available at higher cost.

As a result, after a point, marginal product increases less proportionately than increase in the units of labour and capital. In this way, the law is equally valid in industries.

Postponement of the Law:
The postponement of the law of variable proportions is possible under following conditions:
(i) Improvement in Technique of Production:
The operation of the law can be postponed in case variable factors techniques of production are improved.

(ii) Perfect Substitute:
The law of variable proportion can also be postponed in case factors of production are made perfect substitutes i.e., when one factor can be substituted for the other.

Q1: Law of variable proportion

Law of Variable Proportion is viewed as a significant hypothesis in Economics. It is alluded to as the law which expresses that when the amount of one factor of creation is expanded, while keeping any remaining elements consistent, it will bring about the decay of the minimal result of that factor.

Law of variable extent is otherwise called the Law of Proportionality. At the point when the variable factor turns out to be more, it can prompt negative worth of the minimal item.

Q2: The basic assumption

A supposition that is an unexamined conviction: our opinion without acknowledging we think it. Our inductions (additionally called ends) are frequently founded on presumptions that we haven’t considered fundamentally. A basic mastermind, in any case, is mindful to these suspicions since they are at times wrong or misinformed. Since we expect something is genuine doesn’t mean it is.

Consider cautiously about your presumptions when finding and dissecting data yet additionally consider cautiously about the suspicions of others.

Q3: The 3 stages of variable proportion

√First Stage or Stage of Increasing returns: In this stage, the absolute item increments at an expanding rate. This happens on the grounds that the productivity of the fixed components increments with expansion of variable contributions to the item.

√Second Stage or Stage of Diminishing Returns: In this stage, the absolute item increments at a reducing rate until it arrives at the most extreme point. The minor and normal item are positive however lessening progressively.

√Third Stage or Stage of Negative Returns: In this stage, the all out item decreases and the minimal item gets negative.

Q4: Causes of diminishing marginal returns to a factor.

√Fixed Costs: Diminishing Returns can happen when a business needs to buy new capital gear or other fixed expense. For instance, a maker may make another manufacturing plant, yet it might deliver not exactly existing production lines – thusly making consistent losses.

√Lower degrees of Productivity: at one point, employing an extra specialist can be counterproductive. For instance, 2 staff in a café might be sufficient. Nonetheless, a third, fourth, or fifth representative may establish a tumultuous climate that is wasteful. They may likewise begin chatting with one another instead of chipping away at tables.

√Negative Impact on Working Envrionment:
Every so often, utilizing more individuals can disturb others. For instance, crushing more specialists into a similar office may make an awkward environment. Essentially, acquiring another piece of hardware may make potentially negative results. For example, it might adjust the room calm, consequently influence the nature of different items.

√Short Run: The law of Diminishing Marginal Returns can just happen in the short-run. This is on the grounds that all components are variable over the long haul. For instance, having an extra laborer in the bistro may establish for a tumultuous climate. Notwithstanding, the representatives may figure out how to function all the more proficiently together and along these lines produce better returns in the long haul.

√Limited Demand: A firm may recruit an extra laborer to fulfill request, however they may not cover the full yield that the worker is prepared to do. For instance, a worker might have the option to create 10 units, however there is just interest for 5. Hence, the worker just delivers 5, bringing about consistent losses. We may see this in neighborhood stores which see a low footfall.

Q5: Application of the law of diminishing returns.

The theory of consistent losses expresses that in gainful cycles, expanding a factor of creation by one unit, while holding all others creation factors steady, will eventually return a lower unit of yield per gradual unit of info. The theory of unavoidable losses doesn’t cause an abatement in generally creation abilities, rather it characterizes a point on a creation bend whereby delivering an extra unit of yield will bring about a misfortune and is known as adverse returns. Under consistent losses, yield stays positive anyway profitability and productivity decline.

The law of variable proportions is as follows:

“If a producer increases the units of a variable factor while keeping other factors fixed, then initially the total product increases at an increasing rate, then it increases at a diminishing rate, and finally starts declining.”
Assumptions:
The main assumptions of the law are:

1. No Change in Technology:
First of all, the law is based on the assumption that there is no change in the techniques of production. If the techniques of production undergo a change, in that case the efficiency of production would increase. Therefore, this law applies only if there is no change in the method of technology.

2. Short Period:The law is applicable in the short run as supply of one or the other factor cannot be increased within the short span of time. Thus, they are considered fixed.

3. Homogeneous Units:
All units of variable factors of production are assumed to be homogeneous.

4. Measurement of Product.
The output is measured in physical units like tones, kilograms etc.
Three stages of the law of variable proportion:Phase 1: Increasing Returns to a Factor:

In the first phase, every additional variable factor adds more and more to the total output. It means TP increases at an increasing rate and MP of each variable factor rises. As seen in given schedule and diagram, one labour produces 10 units, while two labours produce 30 units. It implies, TP increases at increasing rate (till point ‘Q’) and MP rises till it reaches its maximum point ‘P’, which marks the end of first phase.
Phase 2: Diminishing Returns to a Factor:

In the second phase, every additional variable factor adds lesser and lesser amount of output. It means TP increases at a diminishing rate and MP falls with increase in variable factor. That is why this phase is known as diminishing returns to a factor. The second phase ends at point ‘S’, when MP is zero and TP is maximum (point ‘M’) at 52 units.

2nd phase is very crucial as a rational producer will always aim to produce in this phase because TP is maximum and MP of each variable factor is positive.

Phase 3: Negative Returns to a Factor:

In the third phase (starting from 6 units of labour), the employment of additional variable factor causes TP to decline. MP now becomes negative. Therefore, this phase is known as negative returns to a factor. In Fig 5.1, the third phase starts after point ‘S’ on MP curve and point ‘M’ on TP curve. MP of each variable factor is negative in the 3rd phase. So, no firm would deliberately choose to operate in this phase

Causes for the Operation of Law of Diminishing Returns (General Application of the Law):
The causes for the operation of law of diminishing returns are discussed below:

1. Fixed Factors of Production:
The law of diminishing returns applies because certain factors of production are kept fixed. All factors of production, land, labour, capital or enterprise cannot be increased every time. As we know that production is the result of the effective combination of factors of production, every factor will have to be increased for obtaining production at increased rates.

If certain factor becomes fixed, the adjustment of factor of production will be disturbed and the production will not increase at increasing rates and thus law of diminishing returns will apply.

2. Scarce Factors:In case of certain factors especially land which is itself limited cannot be increased the law of diminishing return will apply. It may also happen in case of other factors of production. For example, sometimes, labour, specially technical or capital or even enterprise cannot be increased in individual cases. As a result, the adjustment of factors of production will be disturbed and the output cannot be achieved at increasing rates.

3. Lack of Perfect Substitutes:
There is another reason due to which the law of diminishing returns does not apply i.e., lack of perfect substitutes of factors of production. It means that one factor of production cannot be substituted for another factor. Substitute for every factor of production is not always available. In the absence of such substitute, the law of diminishing returns will apply.

4. Optimum Production:
If the perfect adjustment of the factors of production has been made, certainly optimum production will be returned.
Applicability of the Law of Variable Proportions:
The law of variable proportions is universal as it applies to all fields of production. This law applies to any field of production where some factors are fixed and others are variable. That is why it is called the law of universal application.
The main cause of application of this law is the fixity of any one factor.
2. Application to Industries:
In order to increase production of manufactured goods, factors of production has to be increased. It can be increased as desired for a long period, being variable factors.
As a result, after a point, marginal product increases less proportionately than increase in the units of labour and capital. In this way, the law is equally valid in industries.
Postponement of the Law:
The postponement of the law of variable proportions is possible under following conditions:
(i) Improvement in Technique of Production:
The operation of the law can be postponed in case variable factors techniques of production are improved.
(ii) Perfect Substitute:
The law of variable proportion can also be postponed in case factors of production are made perfect substitutes i.e., when one factor can be substituted for the other.

Law of Variable Proportions or LVP is one of the most important laws of production. It shows the nature of rate of change in output due to a change in variable factors.
In the short run, when one input is variable and all other inputs are fixed, the firm’s production function exhibits the law of variable proportions. This law shows the nature of rate of change in output due to a change in only one variable factor of production.
Assumptions of Law of Variable Proportions:
1. It operates in short run, as factors are classified as variable and fixed factor;
2. The law applies to all fixed factors including land;

3. Under law of variable proportions, different units of variable factor can be combined with fixed factor;

4. This law applies to the field of production only;
5. The effect of change in output due to change in variable factor can be easily determined;

6. It is assumed that, factors of production become imperfect substitutes of each other beyond a certain limit;

7. The state of technology is assumed to be constant during the operation of this law;

Three stages of the law of variable proportion:Phase 1: Increasing Returns to a Factor:

In the first phase, every additional variable factor adds more and more to the total output. It means TP increases at an increasing rate and MP of each variable factor rises. As seen in given schedule and diagram, one labour produces 10 units, while two labours produce 30 units. It implies, TP increases at increasing rate (till point ‘Q’) and MP rises till it reaches its maximum point ‘P’, which marks the end of first phase.
Phase 2: Diminishing Returns to a Factor:

In the second phase, every additional variable factor adds lesser and lesser amount of output. It means TP increases at a diminishing rate and MP falls with increase in variable factor. That is why this phase is known as diminishing returns to a factor. The second phase ends at point ‘S’, when MP is zero and TP is maximum (point ‘M’) at 52 units.

2nd phase is very crucial as a rational producer will always aim to produce in this phase because TP is maximum and MP of each variable factor is positive.

Phase 3: Negative Returns to a Factor:

In the third phase (starting from 6 units of labour), the employment of additional variable factor causes TP to decline. MP now becomes negative. Therefore, this phase is known as negative returns to a factor. In Fig 5.1, the third phase starts after point ‘S’ on MP curve and point ‘M’ on TP curve. MP of each variable factor is negative in the 3rd phase. So, no firm would deliberately choose to operate in this phase.

Phase of Operation:
A rational producer will always seek to operate in the 2nd phase of law of variable proportions.

Reasons for Diminishing Returns to a Factor:
1. Optimum Combination of Factors:

Among the different combinations between variable and fixed factor, there is one optimum combination, at which total product (TP) is maximum. After making the optimum use of fixed factor, the marginal return of variable factor begins to diminish. For example, if a machinery (fixed factor) is at its optimum use, when 4 labours are employed, then addition of one more labour will increase TP by very less amount and MP will start diminishing.

2. Imperfect Substitutes:

Diminishing returns to a factor occurs because fixed and variable factors are imperfect substitutes of one another. There is a limit to the extent of which one factor of production can be substituted for another.

For example, labour can be substituted in place of capital or capital can be substituted in place of labour till a particular limit. But, beyond the optimum limit, they become imperfect substitutes of one another, which leads to diminishing returns.
3. Limitation of Fixed Factor:

The negative returns to a factor apply because some factors of production are of fixed nature, which cannot be increased with increase in variable factor in the short run.

4. Poor Coordination between Variable and Fixed Factor:

When variable factor becomes too excessive in relation to fixed factor, then they obstruct each other. It leads to poor coordination between variable and fixed factor. As a result, total output falls instead of rising and marginal product becomes negative.

5, Decrease in Efficiency of Variable Factor:

With continuous increase in variable factor, the advantages of specialization and division of labour start diminishing. It results in inefficiencies of variable factor, which is another reason for the negative returns to eventually set in.
Application of the law of diminishing returns :
Marshall has stated that the law of diminishing returns applies quickly to agriculture, mining, forests, fisheries and building industries. In case of land, it applies to both in its intensive and extensive form of cultivation.
“While the part which nature plays in production shows a tendency to diminishing returns, the part which may plays shows a tendency to increasing returns.” Dr. Marshall

In agriculture, nature plays the key role. It is due to this reason that the law of diminishing returns apply quickly to agriculture. In manufacturing industries, the application of the law is delayed. Modern economists do not agree with this view. They believe that the law applies because one factor is fixed. This fixed nature of the factor can be found in any field of production whether agriculture, industry or any other.

Now we study this one by one:

1. Application of the Law in Agriculture:
In agriculture, nature dominates, so the law of dominates, so the law of diminishing returns applies quickly. In agriculture, more and more doses of labour and capital can be employed with the fixed factor (i.e. land) to produce more. Land being fixed cannot be increased or reduced as per the choice of the agriculturist. Thus as more and more variable factors are employed with the fixed factors, the marginal product falls and hence the law of diminishing returns apply.

2. Application in Extractive Industries:The law of diminishing returns applies quickly to the extractive industries like:

(a) Mines

(b) Fisheries

(c) Buildings:The law of diminishing returns applies quickly to multi-storey building. As the more and more storeys are built, the expenses on upper storeys increase as compared to lower storeys. Thus the law of diminishing returns apply to buildings too.

3. Application in Industries:
In industries, labour and capital play more role than land and these can be increased to any level. It is due to this reason that the law of increasing returns apply in industries. But this does not continue for very long. A stage reaches when the quality of these variable factors deteriorates or the prices of these variable factors increase. These two factors result in diminishing returns.

“The Law of Diminishing Returns is a law of life and can be applicable anywhere and everywhere”.

1) The law diminishing returns states that as the quantity of one factor is increased, keeping the other factor fixed, the marginal product of the other factor will eventually decline.
2) The law is based on the possibility of varying the proportion in which the various factors can be combined to produce a product.
3) The stages of variable proportion are as follows:
a) TP increases at an increasing rate.
b) TP continues to increase but at a diminishing/decreasing rate until it reaches it’s maximum.
c) With the increase in variable factor, TP declines and therefore slopes downwards.
4) Causes of diminishing marginal returns:
a) Fixed Costs
b) limited Demand
c) Negative Employee impact
d) Worse Productivity
5) The law of diminishing returns applies because certain factors of production are kept fixed, if certain factors become fixed, the adjustment of factor of production will be distributed and the production will not increase at an increasing rate and thus, law of diminishing returns will apply.

Definition law variable proportion is referred to as the law which states that when the quantity of one factor of production is increased while keeping all other factor constant,it will result in the decline of the marginal product of that factor .
THE BASIC ASSUMPTION.
The main assumption of law are
1 No change in technology first of all the law is based on the assumption that there is no change in the techniques of production if the techniques of production undergo a change in that case the efficiency of production would increase
2 measurement of product the output is measured in physical units like tones, kilogram
3 homogeneous units all unit of variable factors of production are assumed to be homogeneous
THE THREE STAGE OF VARIABLA PROPORTION
Stage 1 :the total product proportion increases at an increasing rate and the marginal product proportion increase too.the MPP increase with an increase in the unit of variable factor
Stage 2:theTPP continue to increase but at a diminishing rate
Stage 3: Now,the TPP start declining MPP decrease and becomes negative
CAUSES OF DIMINISHING MARGINAL RETURN TO A FACTOR
Diminishing marginal returns occur when an extra additional production unit produces a reduced marginal returns include
Fixed cost
Limited demand
Negative employee impact
Worse productivity
a
APPLICATION OF LAW OF DIMINISHING
The law of diminishing returns applies because certain factors of production are kept fixed if certain factor become fixed the adjustment of factor of production will not increase at increasing rate and thus law of diminishing returns will apply