Law of Variable Proportions/ Law of Diminishing Returns
|The law of variable proportion is one of the fundamental laws in economics. This law deals with the short-run production function. In short run, input and output relations are studied by keeping at least some factors/ inputs of production constant. The law of variable proportion states that when more and more unit of a variable input are applied with the given|
Alfred Marshall discussed the law of diminishing returns in relation to agriculture. He defines the law in these words “An increase in the capital and labor applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture.”
Similarly, according to Prof. Leftwitch, “The law states that if the input of one resource is increased by equal increments per unit of time while the inputs of other resources are held constant, TP will increase, but beyond some point the resulting TP will increases will become smaller and smaller.”
- Constant Technology: The law of variable proportion assumes that the state of technology is constant. The reason is that if the state of technology changes the marginal and average productivity of variable may rise instead of diminishing because of technological improvement.
- Short-run: This law specially operates in the short-run because in the short run some factors are fixed and the proportion of others has to be varied. It assumes that labor (L) is variable factor while capital (K) is the fixed factor.
- Homogeneous Factors: This law is based on the assumption that the variable factor (labor) is applied unit by unit and each factor unit is homogeneous/identical in amount and quality.
- Changeable Input Ratio: The law supposes that it is possible to produce output by changing the ratio of factor inputs; the ratio of fixed and variable factor is changeable; there is no fixed proportion production function.
No. of Labor
Stage of Returns
|Three Stages of Variable Proportions|
- Increase in efficiency of fixed factor: In the initial stage, the quantity of fixed factor is abundant in comparison to the quantity of variable factor. As more units of variable factors are added to the constant quantity of fixed factor than the fixed is more intensively and effectively utilized i.e., the efficiency of fixed factors are added to it.
- Increase in efficiency: In the initial stage, we get increasing returns because as more units of the variable factors are employed, the efficiency of the variable factors itself increases. The reason of efficiency is that with sufficient quantity of variable factor introduction of division of labor and specialization becomes possible which result in higher productivity.
- Scarcity of fixed factor: In the short-run, the quantity of fixed factor cannot be varied. For this reason, the further increases in the variable factor will cause marginal and average product to decline because the fixed factor then becomes inadequate relative to the quantity of variable factor.
- Indivisibility of fixed factor: If the fixed factors are perfectly divisible, there no change in proportion or increasing and decreasingly returns. In short-run, the size of plant is being unchanged, so the fixed factors are indivisible. Therefore, the excess variable factor are used in combination with indivisible fixed factor, the average product of variable factor diminishes.
- Imperfect substitutability of the factors: The operation of law of diminishing returns is the imperfect substitutability of one factor for another. The perfect substitute of the scarce fixed factor been available, then the paucity of the scarce fixed factor during the 2nd stage would have been made up by increasing the supply of the perfect substitute with the result that output could be expended without diminishing returns.
- Too excessive amount of fixed factor: As the amount of the variable factor continue to be increased to constant quantity of the other; a stage is reached when the total product declines and marginal product become negative. This is due to the fact the quantity of variable factor becomes too excessive relative to the fixed factor so that they affect each other’s efficiency.