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Laws of Return
Laws of Return
Inputs in economics are known as factors of production these can be classified under 2 heads:
1.
Fixed factors :- fixed factors of production are those whose factor inputs cannot be changed at different levels of output in the short period. Eg: land, machinery etc. Variable Factor :- Variable factor inputs are those whose quantity will differ at different levels output. Eg : Labour, Raw material etc. There are 2 time periods under which production takes place. Short Run : Some factor inputs are fixed while others are variable. The production in short run can be increased only by increasing. Quantity of variable factors. Long Run : All factors of production become variable the distinction between fixed & variable factor become irrelevant. the production in long run. can be increased by increasing all the factors of production. Production in economics is defined as transformation of input into output. Production includes physical goods & services both. Production function means relation ship between inputs used & resulting output. There are 2 types of production function
2.
1)
2)
CONCEPTS OF PRODUCT 1) Total product / Total physical product :- It is defined as the total quantity & services produced by a firm with the given inputs during a specified period of time or total product is sum total of output of each unit of variable factor used in the process of production. Thus TP = Sum of MPs TP = AP X n 2) Marginal Product :- is a net addition to total product when one more unit of variable factors employed MP = TPn- TPn-1
3)
TP L Average. product :- is the per unit production of the variable factors i.e. AP = TP L
MP
Variabl e Factor 0 1 2 3 4 5 6 7 8
TP
MP TPn TPn-1 0 4 6 (10 - 4) 8 (18 -10) 6 (24 -18) 4 (28 - 24) 0 (28 28) - 8 (20 28) - 4(16 20)
0 4 4 + 6 = 10 10 + 6 = 18 18 + 6 = 24 24 + 4 = 28 28 28 8 = 20 20 4 = 16
L L
Y T A Total product TP
Point of inflexion M
O X
L1
L2
L3 Unit
of
labour
Stage I
Stage II
Stage III
AP
L1
L2
L3 Units of labour MP
(i)
Fuller utilization of fixed factor : In the initial stages Fixed factor remain under utilized its fuller utilization starts with the more application of variable factor, hence, initially additional unit of variable factors add more to the total output
(ii)
Specialization of Labour :- Additional application of Variable factor causes process based division of Labour that raises the efficiency of factors. Accordingly marginal productivity tends to rise. 3. Diminishing return to a factor:-
(i)
Imperfect factor substitutability :- Factors of production are imperfect substitutes of each other. More & more of Labour, for eg. Cannot be continuously used in place of additional capital. Accordingly diminishing returns to variable factor becomes inevitable.
(ii)
Disturbing the optimum proportion :- Continuous increase in application of variable factor along with fixed factors beyond a point crosses the limit of ideal factor ratio. This results in poor co-ordination between the fixed & variable factors which causes diminishing return to a factor.
4.
(i)
Overcrowding :- When more & more variable factors are added to a given quantity of fixed factor it will lead to over crowding & due to this MP of the Labours decreases & it goes into negative
(ii)
Management Problems :- When there are too many workers they may shift the responsibility to others & it becomes difficult for the management to coordinate with them. The Labours avoid doing work. All these things lead to decrease in efficiency of Laboures. Thus the output also decreases. Q. In which stage should a producer operate? A rational producer would always prefer to operate in the 2nnd stage. He will not stay in Ist stage because it is the stage of increasing returns under no circumstances he will also not operate under 3rd stage where the total product starts decreasing. The 1st & 3rd stages are called stages of economic absurdity hence a rational producer would like to operate in 2 nd stage because it is the stage where AP & MP of variable factor are declining but remain positive Thus this is the best stage to work.
Returns to Scale
It refers to a situation in which we study the behavior of output when all the factor inputs are varied in the same proportion. It is applicable in the long run. In long period production of a commodity can be increased by increasing all the factors in the same proportions. If all the factors increase in same proportion the scale of production increases & the corresponding behavior of output is studied as returns to scale. There are 3 aspects of returns to scale (i) Increasing returns to scale occurs when a given percentage increase in all factor inputs in the same ratio causes proportionately greater increase in output : Scale of production Output 1 Machine + 2 Laboures 100 Kgs 2 machine + 4 Laboures 250 Kgs
(ii)
Constant returns to scale :- Under this percentage increase in all factor inputs in the same proportion causes equal percentage increase an output Scale of production Output 1 Machine + 2 Laboures 100 Kgs 2 machine + 4 Laboures 200 Kgs
(iii)
Diminishing returns to scale :- When a percentage increase in all factor inputs in the same ratio causes proportionately lesser increase in output is known as diminishing returns to scale Scale of production Output 1 Machine + 2 Laboures 100 Kgs 2 machine + 4 Laboures 150 Kgs Causes for the operation of Law :- the main reasons for the operation of the different forms of returns to scale are found in economies & diseconomies of scale Economies of Scale It refers to the situation in which increasing the scale of production. Reduces the per unit of cost of production or raises output per unit of factor inputs. Economies are of 2 types (i) Internal economies :- Which are firm specific These are available to that particular firm in the industry which seeks to increase its level of output by way of increasing the scale of production. These are internal became they are not shared by other firms in the industry Eg : Technical economies, Labour economies of purchase & sale, financial economies & economies of risk.
(ii)
External Economies :- These are the economies which are industries specific the are available to all the firms in the industry when the scale of operation of the industry as a whole expands.
Eg :- economies of concentration, economies of info, economies of disintegration. Economies to scale are responsible for increasing returns to scale. Constant returns to scale :- In this situation economies are neutralized by diseconomies. It is clear that the constant returns to scale operates when the total output increases in the same proportion as an increase in the quantity of factor inputs. Diminishing returns to scale occurs due to the diseconomies of scale which means the disadvantages experienced by the production units after increasing the scale of production beyond the maximum limit. Diseconomies are also of 2 types.
(i)
Internal diseconomies :- These disadvantages are firm specific & are not shared by other firms in industry technical economies Eg : managerial diseconomies, & Labour inefficiency. External diseconomies :- these are the disadvantages which are industry specific which are experienced by all the firms in the industry due to increase in scale of production. Eg :- Rise in input prices, higher wager, costlier transport.
(ii)
1. Causes of increasing return to scale (i) Indivisibility :- Some factor of production cannot be divided hence
they cannot be purchased in parts. When scale increases these indivisible factors of production become more efficient & they are more efficiently utilized by the Labours which increases the volume of output.
(ii)
Eg : Double the output by setting up of two plants 3. Causes of diminishing returns to scale
1. Explain the relationship between TP and MP, AP and MP, with the help
of diagram & schedule
6. Difference between return to variable factor & returns to scale. 7. Explain the causes of increasing, constant & diminishing return to
scale. 8. Explain economies & diseconomies of scale.