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Law of Variable Proportion

# Law of Variable Proportion

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12/17/2012

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LAW OF VARIABLE PROPORTIONQ2. Explain the Law of Variable Proporation.Ans. In the short-run the level of production can be changed by changing the factorproportions. This law examines the production function with on factor variable,keeping the other factors quantities fixed. In other words this law explains the short-run production function. When the quantity of one input is varied, keeping otherinputs constant, the proportion between factors changes. When the proportion of variable factors increases, the total output does not always increase in the sameproportion, but in varying proportion. This is why the law is named’ Law of Variableproportions’. The law of variable proportion is the new name given to the famous‘Laws of Diminishing Returns. ‘The law of variable proportion’ or the law of diminishing returns has been defined by a number of economists. In the words of F.Benham. “As the proportion of one factor in a combination of factors is increased,after a point, first the marginal and then the average product of that factor willdiminish”. This law explains return to a factor. Thus, the law states that if more and more units of a variable factor are applied to agiven quantity of fixed factor, the total output may initially increase at an increasingrate but beyond a certain level the total output, the rate of increase in total outputeventually diminishes in the use of additional units of the variable factor. Thevolume of goods produced can be looked at form three different angles viz. :(i)Total Product, (ii) Marginal Product and (iii) Average Product. Total product refers to the total volume of goods produced during a specified periodof time. Total product can be raised only by increasing the quantity of variablefactors employed in production. For instance, more shirts will be produced whenmore labour and capital are used. Total product, generally goes on increasing withan increase in the quantity of the factor services employed. But there is a limit towhich total product can increase with increase in the quantity of variable factors of production.Marginal Product (MP). The rate at which total product increases is known asmarginal product. We also define marginal product as the addition to the totalproduct resulting from a unit increase in the quantity of the variable factor. Initiallymarginal product rises, but ultimately it begins to fall down, it becomes zero and atlast becomes negative. It would be seen that the total product is maximum whenthe marginal product is zero.

Average Product (AP). Average product can be known by dividing total product bythe total number of units of the variable factor.AP=Total ProductUnits of variable factorIt can be easily seen that the average product also show almost the same tendencyas does the marginal product. Initially, both the marginal product and the averageproduct rise but ultimately both of these fall. However, marginal product may bezero. The output does not increase at a constant rate as more of any one input isadded to the production process. For example on a small plot of land. We canimprove the yield by increasing the fertilizer use to some extent. However,excessive use of fertilizer beyond the optimum quantity may lead to reduction inthe output instead of any increase as per the law of Diminishing Returns (forinstance, single application of fertilizers may increase the output by 50 per cent, asecond application by another 30 per cent and the third by 20 per cent. However, if we apply fertilizer five to six times in a year, the output may drop to zero). The principle of diminishing marginal productivity (returns) states that as additionalunits of a variable inputs are added to other inputs that are fixed in supply, theincrement to output eventually decline (for a constant technology). Thisphenomenon has been widely observed and there is enough empirical evidence tosupport it. For business managers, managers, marginal productivity of an inputplays an important part in determining how much of that input will be employed.A hypothetical production function is presented in the following table with the total,average and marginal products of the variable factor labour. Needless to say thatthe amount of other inputs and the state of technology are fixed in this example. TOTAL, AVERAGE AND MARGINAL PRODUCTFixed InputNo. of LabourTotal OutputAPMPX00--Do1333Do2845

Do31244Do4153-3/43Do5173-2/52Do6173-5/60Do7162-2/7-1Do8131-5/8-3 The Law of Variable Proportions explains the relation between proportions of fixedand variable inputs, on the one hand, and output on the other. When a firm expandsoutput by employing more units of avariable factor. It alters the proportionsbetween the fixed and the variable factors. There is always an optimumcombination of factors of production at which cost per unit is minimum. Too less ortoo much of the variable factors leads to cost increases. The law speaks about threestages of production. The first stage goes from origin to the point where theaverage output is maximum. When a firm expands output by increasing thequantity of variable factors in proportion to fixed it moves towards optimumcombination of factors of production. In this stage the law of increaisn return maybe said to operate and marginal product begins to fall i.e law of diminishing returnsset in. The second stage goes from the point where the average output is maximum to thepoint where the marginal output is zero. After having attained the optimum.Combination of the fixed inputs and the variable input, if the firm increases stillfurther the quantity of the variable input, the per unit output of the variable inputfalls. In this stage, total output rises but only at a diminishing rate. The third stage covers the range over which the marginal output is regative andtotal output naturally falls. No producer will operate at this stage, even if he canprocure the variable input at zero price. The first and the third stages are known as stages are known as stages of economicabsurdity or economic non-sense. A producer will always seek to operate in thesecond stage. At which point the producer will operate in this stage will dependupon the prices of the factor inputs. In the following figures we have drawn TP andunits of variable umputs in one figure and AP and MP and units of variable inputs inthe other figure. In both the table and the graphic representation,w e see that bothaverage and marginal products first increase reach the miximum and eventullydecline.