3.5.pptx- LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 2

LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 2

1. Business Economics 107 Unit- 3 Faculty Name: Dr. Shuchi Singhal Designation: Associate Professor School/Dept: Management Email address of Faculty Member: [email protected]

2. Programme Outcomes 2 PO1: Apply knowledge of various functional areas of business PO2: Develop communication and professional presentation skills PO3: Demonstrate critical thinking and Analytical skills for business decision making PO4: Illustrate leadership abilities to make effective and productive teams PO5: Explore the implications and understanding of the process of starting a new venture PO6: Imbibe responsible citizenship towards a sustainable society and ecological environment PO7: Appreciate inclusivity towards diverse cultures and imbibe universal values PO8: Foster Creative thinking to find innovative solutions for various business situations

3. Course Objective and Course Outcomes 3 CO1:Understand the fundamental concepts of Business Economics. CO2:Analyze the relationship between consumer behaviour and demand. CO3:Explore the theory of production through the use of ISO-QUANTS. CO4:Understand the concept and relevance of short-term and long-term cost. CO5:Examine pricing decisions under various market conditions. CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Unit-III : (Theory of Production) 5 3 .1 MEANING AND CONCEPT OF PRODUCTION 3 .2 FACTORS OF PRODUCTION AND PRODUCTION FUNCTION 3 .3 FIXED AND VARIABLE FACTORS 3.4 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS )-Part 1 3.5 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 2 3.6 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)- Part 3 3.7 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 4 3.8 LAW OF RETURNS TO A SCALE(LONG RUN PRODUCTION ANALYSIS) THROUGH THE USE OF ISOQUANTS- Part 2 3.9 LAW OF RETURNS TO A SCALE(LONG RUN PRODUCTION ANALYSIS) THROUGH THE USE OF ISOQUANTS-Part 3 3.10 LAW OF RETURNS TO A SCALE(LONG RUN PRODUCTION ANALYSIS) THROUGH THE USE OF ISOQUANTS- Part 4 3.11 LAW OF RETURNS TO A SCALE(LONG RUN PRODUCTION ANALYSIS) THROUGH THE USE OF ISOQUANTS- Part 5

6. 3.5 Law of Variable Proportion 6

7. 3. 5 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 2 By: Shuchi Goel 7

8. Suggested Readings 1. Author : Christopher R. Thomas & S. Charles Maurice Title of the Book : Managerial Economics-Foundations of Business Analysis and Strategy Chapter’s Name: Production and Cost in the Short Run 2. Author : A. Koutsoyiannis Title of the Book : Modern Microeconomics Chapter’s Name : Theory of Production https://www.toppr.com/guides/fundamentals-of-economics-and-management/theory-of-production/law-of-variable-proportions / By: Shuchi Goel 8

9. 3. 5 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 2 The laws of production describe the technically possible ways of increasing the level of production. Output may increase in various ways. Output can be increased by changing all factors of production. This is possible only in the long run. Thus, returns to scale refers to the long-run analysis of production. By: Shuchi Goel 9

10. In figure 1 , one factor is held variable while other factors are held constant. Quantity of the variable factor is shown on the X-axis and total product, average product and marginal product are measured along the Y-axis. Stage I - Stage of Increasing Returns : In this stage, total product increases at an increasing rate till point C. Marginal product rises up to point C’. From point C’ onwards, total product continues to rise but at a diminishing rate. Thus marginal product falls but is positive. By: Shuchi Goel 10

11. The point C where total product curve stops rising at an increasing rate is called the point of inflexion. The average product however will continue to rise even after the point of inflexion. MP= AP at point A’. Stage 1 ends where the AP reaches its highest point. By: Shuchi Goel 11

12. Stage Total Product Marginal Product Average Product I First increases at increasing rate Increases Increases Then increases at decreasing rate Reaches a maximum point and begins to diminish Continues to increase and becomes maximum II Continues to increase at diminishing rate and becomes maximum Continues to diminish and becomes equal to zero Becomes equal to MP and then begins to diminish III Diminishes Becomes negative Continues to diminish, but will always be greater than zero By: Shuchi Goel 12 Table 1: Three Stages

13. In stage 1, total product is not fully utilised. The quantity of fixed factor is too much relative to the quantity of variable factor so that if some of the fixed factors are withdrawn, the total product would increase. Thus, in this stage, MP of fixed factor is negative. No rational producer will choose to produce in this stage. Producer can expand production by increasing quantity of the variable factor. By: Shuchi Goel 13

14. Conclusion The law of variable proportions states that as we use more and more units of some factor of production to work with one or more fixed factors, the marginal product of that factor will eventually decline By: Shuchi Goel 14