Principles of Economics -1- I.

Com I

Q. No.1 #

Define and explain the law of increasing return with the help of
schedule and diagram. Why it is especially applicable to
manufacturing industries?

Ans:

Introduction:
Law of increasing return is very important in the study of production. Production means
production of goods and services. Production process in the combination of four factors
of production and these factors are of two types i.e. variable factors of production ( labor
and capital) and fixed factors of production ( land and organization). This law is also
known as law of decreasing cost.

Definition:
According to Marshall:
An increase of labor and capital leads generally to improved organization which
increases the efficiency of the work of labor and capital. Therefore and increase of labor
and capital generally gives a return which increase more than in proportion.
In simple wording:
Other things remaining same when the units of variable factors of production are
employed on fixed factors of production, the marginal and average product start
increasing. This tendency in production is known as the law of increasing return.

Assumption:
1. At least one factor of production (land) is assumed to be indivisible.
2. Other factors of production (labor and capital) are assumed to be divisible.
3. Improvement in techniques and organization of production is possible.
4. All units of variable factors of production are homogeneous.
5. No change in the price of factors of production.
6. Stage of optimum combination has not been reached.
7. The law is applicable in the short run.

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Principles of Economics -2- I.Com I

Schedule:
It is clear from the table that the quantity of Fixed FOP Variable FOP MP TP
fixed factors of production is constant that is 10 Acres 1 10 10
10 Acres of land and the units of variable 10 Acres 2 20 30
factors of production are increasing. Table 10 Acres 3 30 60
shows that marginal product and average 10 Acres 4 40 100
product are increasing with increase in 10 Acres 5 50 150
variable factors of production and marginal
cost and average cost is decreasing with increase in variable factors of production. That is
why law of increasing return is also known as law of decreasing cost.

Diagram:
Law of increasing return or decreasing cost
can be explained with the help of diagrams.
In this diagram units of variable FOP are
measured on X-axis and MP is on Y-axis.
MP curve is increasing with the increase in
variable FOP (Positive slope shows direct
relation).

Application of the Law:

By the Alfred Marshall law of increasing
return is applicable where human beings
work more than that of nature. Usually it applies to industries where labor works much
than that of nature. The law is applicable to industry sector because of following reasons.
1. Division of Labor:
The division of labor is possible in industry sector. There is specialization of labor and
management. The work is divided into small parts according to knowledge and skill of
workers. In this way the efficiency of workers increase and cost per unit decrease. This is
high output with low cost.
2. Proper Supervision:
There is proper supervision over different activities in industry due to small area of
working. The result is that there is minimum wastage that leads to decrease in cost.
3. Economies of Scale:
The economies of large scale are available in industry. The internal and external
economies are helpful in reducing the cost of production.
4. Use of Modern Machinery:
There is wider scope of use of modern technology and machinery in industrial sector as
compared to agriculture. The use of modern machinery means more production and
decrease in average cost.
5. Man is dominant:
In industry sector man plays an important role than nature. He tries his best to gain
maximum level of return by applying the next unit of variable factor.

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Principles of Economics -3- I.Com I

Q. No.2 #

Define and explain the law of decreasing return with schedule

and diagram. Why it is especially applicable in agriculture?

Ans:

Introduction:
Law of decreasing return is very important in the study of production. Production means
production of goods and services. Production process in the combination of four factors
of production and these factors are of two types i.e. variable factors of production ( labor
and capital) and fixed factors of production ( land and organization). This law is also
known as law of increasing cost.

Definition:
According to Marshall:
An increase in the amount of capital and labor applied in the cultivation of land causes
in general less than proportionate increase in the amount of produce raised unless it
happens to coincide with an improvement in the art of agriculture.
In simple wording:
Other things remaining same when the units of variable factors of production are
employed on fixed factors of production, the marginal and average product start
decreasing after a particular point. This tendency in production is known as the law of
decreasing return.

Assumption:
1. It is assumed that there should be no change in fixed factors of production.
2. Law of increasing return has actually ended.
3. Best combination of factors of production has crossed the level of optimum point.
4. It is assumed that all the units of variable factor of production are homogeneous.
5. No change in method of production is possible.
6. No change in the price of factors of production.
7. It is assumed that the factors of production are imperfect substitutes for one another.

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Principles of Economics -4- I.Com I

Schedule:
It is clear from the table that the quantity of Fixed FOP Variable FOP MP TP
fixed factors of production is constant that is 10 Acres 1 50 50
10 Acres of land and the units of variable 10 Acres 2 40 90
factors of Production are increasing. Table 10 Acres 3 30 120
shows that marginal product and average 10 Acres 4 20 140
product are decreasing with increase in 10 Acres 5 10 150
variable factors of production and marginal
cost and average cost is increasing with increase in variable factors of production. That is
why law of decreasing return is also known as law of increasing cost.

Diagram:
Law of decreasing return or increasing cost
can be explained with the help of diagrams.
In this diagram units of variable FOP are
measured on X-axis and MP is on Y-axis. MP
curve is decreasing with the increase in
variable FOP (Negative slope shows inverse
relation).

Application of the Law:

By the Alfred Marshall law of decreasing
return is applicable where nature plays more than that of human beings. Usually it applies
to agriculture where nature works much than that of man. The law is applicable to
agriculture sector because of following reasons.
1. Limited Supply of Land:
Area of land is fixed by nature. Due to this natural limitation the agricultural output
cannot be increased at an increasing rate. Because when the quantity of variable factors is
increased, the limited quantity of fixed factor is not enough to make best use of variable
factors.
2. Natural Calamities:
Agriculture depends upon natural forces like rainfall, temperature, floods, earthquakes,
sunshine and weather conditions. Sometimes there is flood and at another time there is
drought. The marginal return to variable factors starts decreasing.
3. Fertility of Land:
Land loses its fertility with the passage of time. Therefore a marginal return from land
tends to diminish with every increase in the units of labor.
4. Division of Labor and Specialization:
Division of labor and specialization is not possible in the field of agriculture. Due to this
output is not increased at an increasing ratio. The benefits of division of labor and
specialization cannot be taken.
5. Seasonal Industries:
Agriculture sector being a seasonal industry labor and capital cannot be worked to their
full capacity as a result cost increase in proportion to the product produced.
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