Law of variable proportion

law of variable proportion

1. Law of Variable Proportion Presented by D hrubAjyoti S adhukhan

2. CONTENTS INTRODUCTION DEFINITION ASSUMPTION EXPLAINATION TABULATION METHOD GRAPHICAL METHOD THREE STAGES OF LAW CAUSES

3. Introduction When producing an economic product, the supplier must decide how much of each input to use: Land Labor Capital In particular, the supplier must examine the relation between input and output

4. The Law of Variable Proportion This law place a vital role in economic theory. It examines the production function with one factor variable, keeping the quantities of other factors fixed. In other words, it refers to the input-output relation when output is increased by varying the quantity of one input.

5. Definitions By Benham – “As the proportion of the factor in a combination of factors is increased after a point, first the marginal and then the average product of that factor will diminish.”  By Samuelson – “An increase in some inputs relative to other fixed inputs will in a given state of technology cause output to increase, but after a point the extra output resulting from the same additions of extra inputs will become less and less .”

6. By Leftwitch – “The law of variable proportion states that if the inputs of one resource is increased by equal increment per unit of time while the inputs of other resources are held constant, total output will increase, but beyond some point the resulting output increases will become smaller and smaller.”

7. Assumptions ( i ) Constant Technology: The state of technology is assumed to be given and constant. If there is an improvement in technology the production function will move upward . (ii) Factor Proportions are Variable: The law assumes that factor proportions are variable. If factors of production are to be combined in a fixed proportion, the law has no validity .

8. ( iii) Homogeneous Factor Units: The units of variable factor are homogeneous. Each unit is identical in quality and amount with every other unit . (iv) Short-Run: The law operates in the short-run where it is not possible to vary all factor inputs. Assumptions

9. Explanation of the law In order to understand the law of variable proportion, we take the example of agriculture. Suppose land and labour are the only two factors of production . As we can observe from the table ( next slide ), the output varies with one of the input is fixed and varying other input. The output varies in three different stages.

10. Fixed factor Variable factor Total Product Marginal Product 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8

11. Calculations of Total Product, Average Product and Marginal Product Total Product The sum total volume of Production or total number of Units produced with the given fixed and variable inputs. Average Product The ratio between total product and number of units of variable factor. AP = TP / Units of Variable Factor Marginal Product The Increment in total output due to the use of an extra unit of labour . MP = ∆ TP/ ∆ L

12. Fixed factor Variable factor Total Product Marginal Product 1 1 2 1 2 5 1 3 9 1 4 12 1 5 14 1 6 15 1 7 15 1 8 14

13. Fixed factor Variable factor Total Product Marginal Product 1 1 2 2 1 2 5 3 1 3 9 4 1 4 12 3 1 5 14 2 1 6 15 1 1 7 15 1 8 14 -1

14. VARIABLE FACTOR (LABOUR) VARIABLE FACTOR (LABOUR) TOTAL PRODUCT STAGE I

15. VARIABLE FACTOR (LABOUR) VARIABLE FACTOR (LABOUR) TOTAL PRODUCT STAGE I STAGE II

16. VARIABLE FACTOR (LABOUR) VARIABLE FACTOR (LABOUR) TOTAL PRODUCT STAGE III STAGE I STAGE II

17. STAGE III POINT OF INFLEXTION STAGE I STAGE II TP AP MP VARIABLE FACTOR (LABOUR) VARIABLE FACTOR (LABOUR) TOTAL PRODUCT

18. 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: Land and Capital (Units of fixed factor) Labour (Units of variable factor) Total Product (TP) (tons of wheat) Marginal Product (MP) Average Product (AV) Stages of Variable Proportions 10 10 10 10 10 10 10 10 10 10 1 2 3 4 5 6 7 8 9 20 50 90 120 140 150 150 140 125 - 20 30 40 30 20 10 -10 -15 - 20 25 30 30 28 25 21.3 17.5 13.8 Increasing returns Decreasing returns ( negative returns)

19. Graphical Representation TOTAL PRODUCT AVERAGE PRODUCT MARGINAL PRODUCT WORKER PRODUCT 1st STAGE Increasing Returns 2 ND STAGE Decreasing Returns 3 RD STAGE Negative Returns

20. Three Stages of Law Stage 1 < Increasing Returns > The output increases in an increasing rate. Stage 2 < Diminishing Returns > The output increases in a diminishing rate Stage 3 < Negative Returns > The output goes in negative value.

21. Cause of Increasing Returns 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.

22. Cause of Diminishing Returns Fixed Factors of Production: 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 .

23. 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.

24. 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.

25. Cause of Negative Returns “ too many cooks spoil the broth ”   When a business experiences decreasing returns and the quantity of variable factor is further increased, the marginal returns becomes negative. In this phase, with every successive increase in the quantity of variable factor employed, the additional returns are negative and therefore the total returns start diminishing . The marginal product of the variable factor is negative due to ‘ Excessiveness ’.

26. THANK YOU