Law of variable proportion:

➢ The law of variable proportion is based on short run production function.

➢ It is called the Law of Variable Proportions because one factor varies and
all others remain constant, the factor ratio or the factor proportion varies.
➢ This law states that keeping other factors constant, when units of variable
factor are increased, then the total product initially increases at an
increasing rate, then increases at a diminishing rate, and eventually
starts declining.

Assumptions of the Law of variable proportion :

1. Only one factor is variable.

2. The scale of output is unchanged.

3. Technique of production does not change.

4. Units of variable factor are homogeneous.

Let’s understand this law with the help of an example:

The land is the fixed factor and labour is the variable factor. The table shows
the different amounts of output at different units of labour:

Land Labour TP AP MP
1 1 6 6 6 1st
1 2 16 8 10 stage
1 3 30 10 14
1 4 40 10 10 2nd
1 5 45 9 5 stage
1 6 48 8 3
1 7 48 6.8 0
 1 8 44 5.5 .4 3rd
1 9 38 4.2 .6 stage

Stage I –

➢ The TP increases at an increasing rate and the AP and MP also

increase.
➢ The MP increases with an increase in the units of the variable factor.
Therefore, it is also called the stage of increasing returns.
➢ A producer does not operate in Stage I.
➢ He can employ more units of the variable factor to efficiently utilize the
fixed factor.
➢ Hence, the producer would prefer to not stop in stage I but will try to
expand further.

Stage II –

➢ The TP continues to increase but at a diminishing rate.

➢ The AP and MP decrease with an increase in the number of units of the
variable factor. Hence, it is called the stage of diminishing returns.
➢ Any rational producer prefers stage II, i.e. the stage of diminishing
returns. This stage is the most relevant stage of operation for a
producer according to the law of variable proportions.

Stage III –

➢ The TP starts declining, AP decreases and MP becomes negative.

Therefore, it is called the stage of negative returns.
➢ Producers do not like to operate in Stage III.
➢ In this stage, there is a decline in total product and the marginal
product becomes negative.