Law of increasing return

Law of increasing return is an important questiion in economics for Icom and Bcom students

1. Law of increasing return Lecture By Shakeel Ahmed Qureshi

2. LAW OF INCREASING RETURN Definition: A ssumptions: In a given state of technology when the units of variable factors are increased with the units of other fixed factors, the marginal productivity increases, it is called law of increasing returns. At least one factor of production is assumed to be constant or indivisible. Some factors (labor and capital) are assumed to be variable or divisible . There is a scope of further improvement in the technique of production. There is no change in the prices of factors of production. All units of variable factors are equally efficient.

3. Fixed Factor (Land) Units of variable factor (labor, capital) Marginal product (MP) Total product (TP) 10 units 1 2 2 10 units 2 4 6 10 units 3 6 12 10 units 4 8 20 10 units 5 10 30 LAW OF INCREASING RETURN Marginal Productivity 1 2 3 4 5 2 4 6 8 10 A B C D E Units of Labour and Capital Marginal product curve

4. LAW OF INCREASING RETURN (LAW OF DIMINISHING COST) The law can also be explained in term of diminishing costs. According to the law of diminishing costs as the output increases, average cost per unit goes on diminishing. Definition: Fixed Factor (Land) variable factor (labor, capital) Marginal product (MP) Total product (TP) Wage Marginal Cost (MC) 10 units 1 2 2 200 200/2 = 100 10 units 2 4 6 200 200/4 = 50 10 units 3 6 12 200 200/6 = 33.3 10 units 4 8 20 200 200/8 = 25 10 units 5 10 30 200 200 /10 = 20

5. Application of the Law: LAW OF INCREASING RETURN The law of increasing return operates in such manufacturing industries where Factors of production are combined and substituted up to some extent. An industry is expanded by getting the internal and external economies of large scale of production. The law is also applicable in that unit which is producing below its capacity. The increase in marginal returns continues till the plant begins to produce to its full capacity. The principle of specialization is applicable in industrial units The marginal productivity increases due to specialization. In industrial sector human factors are more involved than natural factors. Due to this reason natural obstacles are less effective.