Law of variable proportion is an extension of an another law — Law of Diminishing Returns of classical economists.
It examines how the output will vary in the short run as we apply more of a variable factor to the given quantity of a fixed factor.
The term variable proportions in the law of variable proportions indicates changes in the proportion of fixed and variable factors. When different quantities of a variable factor, i.e., labour, are applied to the given quantity of a fixed factors , i.e., capital, the proportions in which the two factors are combined are being changed.
Question : Explain the Law of Variable Proportions with the help of a diagram.
Question : “If more variable factors are employed with fixed factors, the total product increases initially at an increasing rate and finally it falls”. Explain the three stages of the law of variable proportions with the help of TP, AP and MP curves.
Law of Variable Proportions:
#1. Statement of the Law :
The law of variable proportion states:
“ as more and more units of a variable factor are applied to the given quantity of a fixed factor, total product may increase at an increasing rate initially, but eventually it will increase at a diminishing rate”.
#2. Assumption of the Law:
The law of variable proportions is based on certain assumptions -
1. The state of technology is given and remains unchanged.
2. It is assumed that some inputs are kept fixed while others are varied.
3. Factor Proportions are variable:
The law assumes that factor proportion are variable. If factors are to be combined in a fixed proportion, the law has no validity.
4. Homogeneous Factor Units :
All the units of the variable factor are homogeneous and each unit is identical in quantity and amount with every other unit.
5. Short — Run:
The law operates in the short — run when it is not possible to vary all factor input.
#3. Illustration of the Law:
- Curves are plotted between quantity of product (on Y- axis) and number of variable factor ( i.e. labour) (on X — axis).
- TP curve is total product curve, MP curve is marginal product curve while AP curve is average product curve.
- At the upper panel, TP curve shows, Total Product (TP) increases at an increasing rate up to point M .Then increases at a diminishing rate it reaches up to maximum. TP is maximum at point T and then starts decreasing.
- Curve MP shows the behaviour of marginal product, MP curve rises up to the maximum point M. Then it starts decreasing. It intersects the rising AP curve at point A and continue to decrease. At point T , MP curve becomes zero.
- AP curve rises from the beginning and reaches maximum at point A and then falls but it remain positive throughout. While MP curve further fall to become negative.
# Three Stages of Production:
Question : Using suitable diagram explain the three stages of production when one factor is variable.
Three stages of the Law:
1. First Stage (Stage of Increasing Return) :
First stage starts from origin point ‘O’ and ends at point ‘A’ where the Average Product is maximum.
There is an increase in Total Product (TP) throughout. But TP increases at an increasing rate up to point ‘M’ and then increases at a diminishing rate between M and A.
The point M is called point of inflexion where TP curve changes its slope.
In this stage MP rises first and reaches its maximum at point ‘M’ and then it starts decreasing , but it remains positive throughout.
In this stage AP increases throughout, therefore AP curve is positive sloped throughout.
2. Second Stage ( Stage of Diminishing Return) :
This stage starts at point ‘A’ where AP is maximum and ends at point ‘T’ where MP is zero.
In this stage total product continues to increase at a diminishing rate and eventually reaches the maximum. Hence TP curve rises at diminishing rate and reaches the maximum point at ‘T’.
MP curve continues to decrease until it becomes zero, but remains positive.
AP curve, starts decreasing.
3. Third Stage (Stage of Negative Returns):
This stage begins, beyond point ‘T’.
Total Product TP starts falling thus, the TP curve diminishing or slopes downward.
Marginal product of the variable factor is therefore negative and the marginal product (MP) curve goes below the X- axis or turns negative.
Average product is decreasing but it remains positive.
Three Stages of the Law of Variable Proportions :
Explanation of the Law of Variable Proportions:
It is important to know the reason of increasing, diminishing and negative returns in the three phases of the law of variable proportions.
A. Causes of Increasing Returns:
1. Fuller Utilisation of fixed factors:
In the beginning, the amount of fixed factor is too large while the amount of variable factor is increasing from a small amount.
Therefore fixed factors remain unutilised to some extent.
Fuller utilisation of fixed factor requires greater application of variable factor.
For example, if there is only one labourer, he can operate only one machine at a point of time, and four machines will remain unutilised. If the number of workers is increased from 1 to 2, from 2 to 3 and so on, the machine (fixed factor) is utilised better and more effectively.
As a result, additional units of the variable factor leads to increase in the marginal product of the variable factor.
2. Increase in Efficiency:
As the number of variable factor is increased in first stage, the efficiency of variable factor itself increases.
This is because of division of labour and specialisation.
Question : Explain the two causes of increasing returns ?
B. Causes of Diminishing Returns:
1. Disturbing the Optimum Proportion:
As more and more quantity of the variable factor is employed on the given amount of a fixed factor, the fixed factor is better utilised.
But there is an optimum combination of fixed and variable factors when the fixed factor is fully and efficiently utilised.
Further addition of variable factor will disturb this optimum combination which leads to a fall in the average and marginal product.
2. Imperfect Substitutability of factors of Production:
We can substitute one factor for another factor.
For example, more labour can be employed in place of capital.
But there is a limit to which on input can be substituted for another.
Therefore, diminishing returns will operate because we can not effectively substitute labour for capital.
Question : Explain two causes for diminishing returns ?
C. Causes for Negative Returns:
1. Overcrowding :
Further addition of variable factor (labour) with the given quantity of a fixed factor, will lead to overcrowding of variable factor.
This results in lower availability of tools and equipment per worker.
This will cause a fall in productivity.
2. Management Problem :
Use of too much variable factor like labour also creates the problem of effective management.
Example, when there are too many workers, they may shift responsibility to others.
It becomes difficult to manage them. The labourer may avoid work.
It becomes difficult to fix accountability.
All this leads to decrease in efficiency.
Question: In which stage of production a producer will produce ? Explain .
Answer:
A producer or firm will want to produce in stage 2 (second stage). This can be explained by the process of elimination.
# A rational producer would not like to operate in third stage (stage 3).
In stage 3 the marginal product of the variable factor is negative.
This to increase the total product, producers has to employ less of the variable factor (labour) .
Thus, he will not operate in stage 3 .
# A rational producer would not like to operate in stage 1.
Because the average product (AP) is increasing throughout the stage.
If the producer stops operating before the stage 1 ends, it means that he is not taking full advantage of rising productivity.
The firm has an incentive (stimulant) to employ more of variable factor throughout the stage 1 because by employing them it can increase the average product (AP) , reduce average cost and increase profit.
Thus, total profit increases if production is done beyond the region of rising average product (AP) in (stage 1).
Hence the rational producer would operate in stage 2.
Also Read :
# Total Product, Marginal Product and Average Product
# Comparison between Returns to a Factor and Returns to Scale