This stage is called the stage of negative returns, as total product, average product and marginal product fall during this stage and the average product of the variable factor is non-negative. A firm increases its level of production in the short run by making changes in input- mix. As seen above, diminishing returns occur during the second stage since the fixed factor is now inadequate relatively to the variable factor. Therefore, in stage 3, the marginal product of the variable factor is negative. In other words, by using every additional unit of a variable factor, the factor proportions between fixed and variable factor varies. Causes of Initial Increasing marginal Returns to a Factor: In the beginning, the quantity of the fixed factor is abundant relative to the quantity of the variable factor.
In other words, due to excessive variable factors, there would be mismanagement, lack of supervision, overcrowding, lack of coordination, which ultimately results in decrease in production. For instance, the marginal product of capital is negative at G and that of labour at R. Here marginal product has started falling. It does not apply to cases where the factors have to be used in fixed proportions to yield fixed products. When thequantity of one input isvaried, keeping other inputsconstant, the proportion betweenfactors changes.
The table shows the different amounts of output obtained by applying different units of labor to one acre of labor to one Ropani of land, which is fixed. Stage two shows a continued increase in output, but at a declining rate. We shall first explain it by considering Table 16. The law of variable proportions is illustrated in Table 16. Thus, in the first stage, marginal product of the fixed factor is negative. The law is of fundamental importance for understanding the problems of underdeveloped countries.
Hence, indivisibility of fixed inputs is the first cause for increasing returns. Producer can expand production by increasing quantity of the variable factor and make efficient use of the fixed factor. Secondly, as more and more variable inputs are employed, their efficiency tends to rise, because specialization or the so-called division of labour takes place. How the total product, average product and marginal product a variable factor change as a result of the increase in its quantity, that is, by increasing the quantity of one factor to a fixed quantity of the others will be seen from Fig. This law examines the production function with one factor variable, keeping the quantities of other factors fixed.
Thus the stage of diminishing returns may be called the stage of increasing cost. Stage 2: In stage 2, the total product continues to increase at a diminishing rate until it reaches its maximum point H where the second stage ends. This stage goes to the point when total product reaches the maximum and marginal product becomes zero. Now, we have abundant variable inputs relative to indivisible fixed input. In essence, this law describes changing the proportion of two or more factors in a process used to create the same product to increase returns, eventually resulting in lesser output.
It is thus clear from above that the rational producer will never be found producing in stage 1 and stage 3. Rising marginal product also pulls up the average product. If the number of laborers is increased to 2, the new proportion between labour and land will be 2: 5. It is also called the law of proportionality. Explanation of the law: Suppose you have two hectares of land and the equipment required to farm tomatoes.
Assumptions of the Law: The law of variable proportions or diminishing returns, as stated above, holds good under the following conditions: 1. When a farm expanse its production it may some benefited due to external economies which ultimately help to reduce cost per unit of output. This tendency in the theory of production called the Law of Variable Proportion. The law of variable proportions is an economics term that describes when a business increases one factor of production while keeping another factor constant, causing the increase of production levels created through these changing factors to decrease gradually. Average product continues to increase till marginal product is greater than the average product. This law applies to any field of production where some factors are fixed and others are variable. The main cause of application of this law is the fixity of any one factor.
As a result, the marginal and average products of the variable factor decline ultimately. However, marginal product curve falls earlier than the average product curve. It implies that the marginal product of labour continues to decline with the employment of larger quantities to it. At the end point M of the second stage where the marginal product of the variable factor is zero, the producer will be maximising the total product and will thus be making maximum use of the variable factor. Thus, a pump set being an indivisible factor, its cost can be decline if it is utilized up to its optimum capacity. On the other hand, in stage 3 the variable factor is too much relative to the fixed factor. This stage is known as the stage of diminishing returns also.
In this stage, efficiency of variable as well as fixed factor declines and factor ratio is highly sub-optimal. One factor cannot be used in place of the other factor. That is why this law is a universal one. In this stage both the marginal product and the average product of the variable factor are diminishing but remain positive. By keeping land as a fixed factor, the production of variable factor i. It includes economies of buying and selling, financial, technical managerial economies etc. This has been done in Fig.
Once the optimum proportion is disturbed by further increases in the variable factor, returns to a variable factor i. In our example, the first stage, of the law runs up to four units are labor and this limit is shown by point A in the diagram. Perfect divisibility of the factors implies that a small firm with a small machine and one worker would be as efficient as a large firm with a large machine and many workers. 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. As a result, costs of production tend to rise. Graphic Presentation : In fig. For instance, at point H the marginal product of capital is zero, and at point L the marginal product of labour is zero.