THE LAWS OF PRODUCTION

LAWS OF VARIABLE PROPORTIONS

LAWS OF RETURNS TO SCALE

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 THE LAWS OF PRODUCTION

LAWS OF VARIABLE LAWS OF RETURNS

PROPORTIONS TO SCALE

Relates to the study of Relates to the study of

input output input output
relationship in the short relationship in the long
run with one variable run assuming all inputs
input while other inputs to be variable
are held constant

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 The Law of Variable Proportions
In the short run, as the amount of variable factors
increases, other things remaining equal, OP(or the
returns to the factors varied will increase more
than proportionally to the a amount of the
variable inputs in the beginning than it may
increase in the same proportion and ultimately it
will increase less proportionately.
• Assuming that the firm only varies the labour (L),
it alters the proportion between the fixed input
and the variable input. As this altering goes on,
the firm experiences the Law of Diminishing
Marginal Returns.
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 Production Schedule
Units of Total Average Marginal Product
Using the concept
Variable Product Product (TPn- TPn-1)
of MP, During the Input (TP) (AP) (TPn)
SR, under the given (Labour)
state of technology
and other (n)
conditions
remaining 1 20 20 20
unchanged, with
the given fixed 2 50 25 30
factors, when the STAGE I
units of a variable
factor are 3 90 30 40
increased in the
production
function in order to 4 120 30 30
increase the TP, the
TP initially may rise 5 135 27 15
at an increasing
rate and after a
point, it tends to 6 144 24 9
increase at a
decreasing rate 7 147 21 3 STAGE II
because the MP of
the variable factor
in the beginning 8 148 18.5 1
may tend to rise
but eventually
tends to diminish. 9 148 16.4 0

10 145 14.5 -3 STAGE III

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 TP

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 Stages

Diminishing Total returns -implies reduction in total

product with every additional unit of input.
Diminishing Average returns -which refers to the
portion of the Average Physical Product curve after
its intersection with MPP curve.
Diminishing Marginal returns refers to the point
where the MPP curve starts to slope down and
travels all the way down to the x-axis and beyond.
Putting it in a chronological order, at first the
marginal returns start to diminish, then the average
returns, followed finally by the total returns.
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 Observations
The L of DMR becomes evident in the marginal product column.

Initially MP of Labor rises . The TP rises at an increasing rate (= MP).

Average Product also rises. Stage of increasing Returns

After certain point (4th unit of Labour), the MP begins to diminish. Rate
of increase in the TP slows down. Stage of diminishing returns. When AP
is max, AP=MP=30 at 4th unit of labour.

AS MP diminishes, it becomes zero and negative thereafter (Stage III)

When MP is zero, TP is maximum. (148 is the highest amount of TP,

when MP is equal to 0 when 9 units of labour are employed.

When MP becomes negative, TP also starts to diminish in the same

proportion but AP declines after being positive up to a certain point.

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 Question
Following data relates to the quantity of tuna that could be caught with
different crew sizes.

No. of 3 4 5 6 7 8 9
fisherme
n
Daily 300 450 590 665 700 725 710
Tuna
Catch

Indicate the points that delineate the three stages of production .

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 Explanation of the stages
• The operation of the law of diminishing
returns in three stages is attributed to two
fundamental characteristics of factors of
production:
i) Indivisibility of certain fixed factors.
ii) Imperfect substitutability between factors.

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 Production function with one variable
input

• Total Product: Q = 30L+20L2-L3

• Average Product : Q /L
• Marginal Product : MP = dQ/dL = 30+40L-3L2

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 What is long run production
function ?
 Long run refers to that time in the future
when all inputs are variable inputs.

 In the long run both capital and labour are

included

 Output can be varied by changing the levels

of both L & K and the long run production
function is expressed as:

Q = f (L, K)
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