Law of variable proportion and law of return to scale

Production - Law of variable proportion - 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 Short-run production function :-which is explained by law of variable proportions. 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

7. This Law Has Three Stages Stage Of Increasing Returns To A Factor Stage Of Diminishing Returns To A factor Stage Of Negative Returns To A Factor

8. 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

9. 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.

10. 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.

11. Causes of increasing returns to a factor: Fuller utilization of the fixed factor Increased efficiency of variable factor Better coordination between the factors

12. Short-run Production Function Law of Variable Proportion Long-run Production Function Law of Returns To Scale OR Law Of Return To Factor

13. 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.

14. Law Of Returns To Scale

15. 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

16. 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%

17. 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%

18. 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

19. Thank You !!!