3.6.pptx-LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 3

LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 3

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. 3.6 Law of Variable Proportion Causes 6

7. 3. 6 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 3 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. 6 LAW OF VARIABLE PROPORTION (SHORT RUN PRODUCTION ANALYSIS)-Part 3 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. Stage II - Stage of Diminishing Returns : In stage II, total product continues to increase at a diminishing rate until it becomes maximum. In this stage, both the AP and MP of the variable factor are diminishing (but not negative), the latter falling at faster rate. The AP of the variable factor exceeds the MP throughout this stage . At the end of second stage, the MP of variable factor is zero (corresponding to the highest point on the TP curve). It is the stage of operation. A rational producer will always seek to produce in this stage. By: Shuchi Goel 10

11. Stage III - Stage of Negative Returns : In stage III, total product declines. So, MP of the variable factor becomes negative. This stage is called the stage of negative returns as TP, AP and MP fall during this stage and AP of the variable factor is non negative. Producers should reduce the amount of variable factor. By: Shuchi Goel 11

12. Stage of Operation: A rational producer will never produce in stage 3 where MP of the variable factor is negative. This being so a producer can always increase the output by reducing the amount of variable factor. A rational producer will also not produce in stage 1 as he will not be making the best use of fixed factors and he will not be utilizing fully the opportunities of increasing production by increasing the quantity of variable factor whose AP continues to rise throughout stage I. A rational producer will operate in stage II where the TP is maximum and will stop at the end of this stage where the MP zero. By: Shuchi Goel 12

13. Causing of Increasing Returns: There are two important reasons for increasing returns: Indivisibility: Generally, the fixed factors which are combined with variable factors are indivisible. Such factors cannot be divided into smaller units, since division will result either in total uselessness or partial loss in efficiency. For example a manager cant be chopped in half and asked to produce half the current output. By: Shuchi Goel 13

14. Indivisibility of a factor means that a minimum amount of it must be employed, whatever is the level of output . In initial stages, the supply of fixed factor is too large and it is indivisible. On the other hand, the variable factor units are too few. Thus, the fixed indivisible factor is not efficiently employed. When the units of the variable factor are increased and combined with this fixed factor, the latter is utilised better and more fully. By: Shuchi Goel 14

15. In the beginning, the quantity of fixed factor is abundant relative to the quantity of variable factor. Therefore, when more and more units of variable factor are added to the constant quantity of fixed factor (indivisible factors like plant and machinery), then the fixed factor is more intensively and effectively utilized . This causes the production to increase at a rapid rate. Specialisation: The second reason why we get increasing returns at the initial stage is that as more units of the variable factors are employed the efficiency of the variable factor itself increases. By: Shuchi Goel 15

16. This is because when there is a sufficient quantity of the variable factor, it becomes possible to introduce specialization or division of labour which results in higher productivity. Causing of Diminishing Returns: Once the point is reached at which the amount of variable factor is sufficient to ensure the efficient utilization of fixed factor, the further increase in variable factor will cause marginal and average product to decline because the fixed factor then becomes inadequate in relation to the quantity of variable factor. By: Shuchi Goel 16

17. In other words the contributions to the production made by the variable factor after a point become less and less because the additional units of the variable factors have less and less of fixed factors to work with. Causing of Negative Returns: The phenomenon of negative returns in Stage-Ill is due to the fact that the number of variable factor becomes too excessive relative to the fixed factor so that they get in each other’s way with the result that the total output falls instead of rising. By: Shuchi Goel 17

18. In other words, due to excessive variable factors, there would be mismanagement, lack of supervision, overcrowding, lack of co­ordination, which ultimately results in decrease in production . The proverb “Too many cooks spoil the broth” aptly applies to this situation. In this stage the marginal product of variable factor is negative. By: Shuchi Goel 18

19. 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 19