Law of variable proportion and law of return to scale
1. Production
Law of Variable Proportion
Law of Return To Scale
Prepared By:
Mohammed Jasir PV
Asst. Professor
MIIMS, Puthanangadi
Contact: 9605 69 32 66
2. Production
Production is the process of converting input into output.
Inputs
Land
Labour
Capital
Raw
Materials
Machines
Outputs
Goods &
Services
Transformation Process
Production
3. Time horizon of analysis
Two different time periods are used to develop theories of production
and production cost are
• Short run:- the period of time in which labor and material can be
changed, but all inputs cannot be changed simultaneously,
especially equipment and machinery cannot be fully modified or
increased.
• Long run:- long run is defined as that time period over which a firm
can vary quantities of all factors of production
4. Production function may be classified into two
1. Short-run production function:-which is explained by law of variable
proportions.
2. Long-run production function:-which is explained by returns to scale
5. The Law of Variable Proportions /
Law of Proportionality
The law of variable proportion states that ,
– if one factor is used more and more (variable), keeping the other factors
constant,
– the total output will increase at an increasing rate in the beginning and
– Then increase in a diminishing rate and
– eventually decreases provided there is no change in technology.
6. Assumption of Law Of Variable Proportion
• Short-run
• Constant Technology
• Factor units are homogenous
10. This Law Has Three Stages
1. Stage Of Increasing Returns To A Factor
2. Stage Of Diminishing Returns To A factor
3. Stage Of Negative Returns To A Factor
11. • During this stage total product, average product
and marginal product are increasing.
• This is because the efficiency of the fixed factors
increases as additional units of the variable factors
are added to it.
• Marginal product in this stage increases but in the
later part it starts declining.
• Though marginal product starts declining, it is
greater than the average product and the average
product continues to rise.
• Stage 1 ends where average product reaches its
maximum.
Stage 1- Stage Of Increasing Returns To A Factor
12. Stage II Stage Of Diminishing Returns To A factor
• In the second stage , total product continues to increase
but at a diminishing rate .
• This is because the fixed factor becomes inadequate
relative to the quantity of the variable factor.
• The marginal product and average product are declining
but are positive.
• At the end of the second stage, the total product is
maximum and the marginal product is zero.
• Stage II ends at the point where the marginal product is
zero.
13. Stage III Stage Of Negative Returns To A Factor
• In this stage total product starts to decline.
• Average product shows a steady decline, but never
becomes zero.
• Marginal product becomes negative.
• As marginal product becomes negative this stage is
known as stage of negative returns.
14. Causes of increasing returns to a factor:
• Fuller utilization of the fixed factor
• Increased efficiency of variable factor
• Better coordination between the factors
15. • Short-run Production Function
Law of Variable Proportion
• Long-run Production Function
Law of Returns To Scale
OR
Law Of Return To Factor
16. Law Of Returns To Scale
• Law of returns to scale is a long run concept.
• It is the study of changes in output when all factors or inputs in a
production function are increased together.
• The theory shows the behavior of output in response to changes in the
scale.
• A return to scale is the rate at which the output increases with the
increase in all inputs proportionately.
18. There are three cases to return to scale
Case I :- Increasing return to scale:
• When input are increased in a given proportion
and output increases in a greater proportion,
the return to scale is said to be increasing.
• Example: If the inputs are increased by 40%
and output increased by 50%, return to scale
are increasing
19. Stage II. Constant return to scale
• When inputs are increased in a given proportion and
output increased in the same proportion.
• Example: when the input are increased by 40% and the
output also increased by 40%
20. 3. Decreasing returns to scale
• If the firm continues to expand beyond the stage of
constant returns, the stage of diminishing returns to
scale will start to operate.
• If a proportionate increase in all inputs results in less
than proportionate increase in output.
• Example: if the input are increased by 40% but output
increased by only 30%
21. The following table explains the numerical illustration of returns to scale
Units Of
Capital
Units Of
Labour
Total
Output
%Change
In Inputs
%Change
In Outputs
Returns To
Scale
2 15 30 - - -
4 30 75 100 150 Increasing
6 45 120 50 60 Increasing
8 60 160 33 33 Constant
10 75 180 25 13 Decreasing