Managerial Economics

Assignment
Total marks: 10 marks
Submission date: 18th December, 2020

Q. The production law states that “as the quantity of one factor is increased, keeping the
other factors fixed, the marginal product of that factor will eventually decline”.
Identify which law of production is being talked about and explain the existence of the law
in any industry of your choice.

Answer. The Law of Variable proportion states that “as the quantity of one factor is
increased, keeping the other factors fixed, the marginal product of that factor will
eventually decline”.
Which means keeping other factors constant, when you increase the variable factor, then the
total product initially increases at an increases rate, then increases at a diminishing rate, and
eventually starts declining.

Example, there is a production industry which is working in short run. The industry can’t afford
a new machine as they are in short run. So, they are increasing the total number of labors
working on a machine.
Here they are increasing the number of worker from 1 to 11.
LABOUR Total product Average Marginal Stage
product product
1 100 100 100 1st stage
2 210 105 110
3 330 110 120
4 440 110 110
5 520 104 80 2nd stage
6 600 100 80
7 670 95.7 70
8 720 90 50
9 750 83.3 30
10 750 75 0
11 740 67.2 -20 3rd stage

 Here, we can see TP increase with the increase in labor but later it falls.
 The AP too increases initially but later it will start falling.
 The MP also increases initially ut later falls.

If we observe the behavior of the marginal product further, we would know that it is gradually
falling. Hence, the new worker is producing lesser units than the earlier one. As the number of
workers are increasing, there is very little work left for the new worker to do on the machine.
Hence, the end workers have very little to contribute as already maximum work is done by the
initial workers.

Also, the marginal product of the 11th labour is negative. This would clearly imply that the 11th
labour is not needed. The machine in the example can only have a maximum of 10 labours.
Hence, if there is excess labour, this would create a havoc and the disturbance would cause the
‘Total Product’ to fall instead of rising.

Hence, a prudent entrepreneur stops at the end of stage 2 as shown in the table where the ‘Total
Product’ is maximum and the ‘Marginal Product’ is zero.

The graph will be like this:

STAGE 1: Law of increasing returns: Here, the total product increases at a faster rate. The
marginal product increases and then falls. The average product increases and reaches its
maximum point.

STAGE 2: Law of diminishing returns: Here, the total product increases at a slower rate and
reaches its maximum point. The average product falls for the very first time.
STAGE 3:  Law of negative returns: Here, the total product falls for the very first time. The
average product falls further and the marginal product goes negative for the very first time.