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Law of variable proportion for Managerial Economics Mcom Delhi University

Law of variable proportion for Managerial Economics Mcom Delhi University

Law of variable proportion for Managerial Economics Mcom Delhi University

Law of variable Proportion

The law of variable proportion states that if the input of one resource is increased by equal increments per unit time while the inputs of other resources kept constant, total product ( output) increases, but beyond certain point the resulting output is increases with reducing rate.
Assumptions:
1. Constant technology: The law of variable proportions assumes constant techniques of production. The reson is that if the state of the technology changes then the marginal and average product may rise instead of diminishing.
2. Short run: The law is specially operates in the short run becausse here some factors are fixed and the proportion of the other factors has to be varied. It assume that one factor is varies while the others are fixed.
3. Homogenous factors: The law is based on the fact that variable resources is applied unit by unit. and each factor unit is homogeneous in amount or quality.
4. Variable input factors: The law supposes the possibility of the ratio of the fixed factors to the variable factors being changed. In other word ,it is possible to use various amounts of a variable factors with fixed factors of production.

Law of variable proportion for Managerial Economics Mcom Delhi University

Explanation of the Law:

In order to understand the law of variable proportions we take the example of agriculture. Suppose land and labour are the only two factors of production.

By keeping land as a fixed factor, the production of variable factor i.e., labour can be shown with the help of the following table:

Variable Factor of Production

Law of variable proportion for Managerial Economics Mcom Delhi University

From the table 1 it is clear that there are three stages of the law of variable proportion. In the first stage average production increases as there are more and more doses of labour and capital employed with fixed factors (land). We see that total product, average product, and marginal product increases but average product and marginal product increases up to 40 units. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. This is the end of the first stage.

The second stage starts from where the first stage ends or where AP=MP. In this stage, average product and marginal product start falling. We should note that marginal product falls at a faster rate than the average product. Here, total product increases at a diminishing rate. It is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative.

The third stage begins where second stage ends. This starts from 8th unit. Here, marginal product is negative and total product falls but average product is still positive. At this stage, any additional dose leads to positive nuisance because additional dose leads to negative marginal product.

Law of variable proportion for Managerial Economics Mcom Delhi University

Three Stages of the Law:

1. First Stage:

First stage starts from point ‘O’ and ends up to point F. At point F average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate up to point E. between ‘E’ and ‘F’ it increases at diminishing rate. Similarly marginal product also increases initially and reaches its maximum at point ‘H’. Later on, it begins to diminish and becomes equal to average product at point T. In this stage, marginal product exceeds average product (MP > AP).

2. Second Stage:

It begins from the point F. In this stage, total product increases at diminishing rate and is at its maximum at point ‘G’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘C’. Average product is maximum at point ‘I’ and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP < AP).

3. Third Stage:

This stage begins beyond point ‘G’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. Law of diminishing returns firmly manifests itself. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only.

Three Stages of Law of Production Function

Law of variable proportion for Managerial Economics Mcom Delhi University

In Which Stage Rational Decision is Possible:

To make the things simple, let us suppose that, a is variable factor and b is the fixed factor. And a1, a2 , a3….are units of a and b1 b2b3…… are unit of b.

Stage I is characterized by increasing AP, so that the total product must also be increasing. This means that the efficiency of the variable factor of production is increasing i.e., output per unit of a is increasing. The efficiency of b, the fixed factor, is also increasing, since the total product with b1 is increasing.

The stage II is characterized by decreasing AP and a decreasing MP, but with MP not negative. Thus, the efficiency of the variable factor is falling, while the efficiency of b, the fixed factor, is increasing, since the TP with b1 continues to increase.

Finally, stage III is characterized by falling AP and MP, and further by negative MP. Thus, the efficiency of both the fixed and variable factor is decreasing.

Law of variable proportion for Managerial Economics Mcom Delhi University

Condition or Causes of Applicability:

There are many causes which are responsible for the application of the law of variable proportions.

They are as follows:

1. Under Utilization of Fixed Factor:

In initial stage of production, fixed factors of production like land or machine, is under-utilized. More units of variable factor, like labour, are needed for its proper utilization. As a result of employment of additional units of variable factors there is proper utilization of fixed factor. In short, increasing returns to a factor begins to manifest itself in the first stage.

2. Fixed Factors of Production.

The foremost cause of the operation of this law is that some of the factors of production are fixed during the short period. When the fixed factor is used with variable factor, then its ratio compared to variable factor falls. Production is the result of the co-operation of all factors. When an additional unit of a variable factor has to produce with the help of relatively fixed factor, then the marginal return of variable factor begins to decline.

3. Optimum Production:

After making the optimum use of a fixed factor, then the marginal return of such variable factor begins to diminish. The simple reason is that after the optimum use, the ratio of fixed and variable factors become defective. Let us suppose a machine is a fixed factor of production. It is put to optimum use when 4 labourers are employed on it. If 5 labourers are put on it, then total production increases very little and the marginal product diminishes.

4. Imperfect Substitutes:

Mrs. Joan Robinson has put the argument that imperfect substitution of factors is mainly responsible for the operation of the law of diminishing returns. One factor cannot be used in place of the other factor. After optimum use of fixed factors, variable factors are increased and the amount of fixed factor could be increased by its substitutes.

Such a substitution would increase the production in the same proportion as earlier. But in real practice factors are imperfect substitutes. However, after the optimum use of a fixed factor, it cannot be substituted by another factor.

Law of variable proportion for Managerial Economics Mcom Delhi University

Postponement of the Law:

The postponement of the law of variable proportions is possible under following conditions:

(i) Improvement in Technique of Production:

The operation of the law can be postponed in case variable factors techniques of production are improved.

(ii) Perfect Substitute:

The law of variable proportion can also be postponed in case factors of production are made perfect substitutes i.e., when one factor can be substituted for the other.

Law of variable proportion for Managerial Economics Mcom Delhi University

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Law of variable proportion for Managerial Economics Mcom Delhi University

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