Lecture 2 - Law of Returns to a Factor

For undergraduate agricultural students of the course ‘Ag. Econ. 6.4 Farm Management, Production, and Resource Economics (2+1)’ of Junagadh Agricultural University, Gujarat and other State Agricultural Universities in India.

1. Lecture 2: Law of Returns

2. Laws of returns Explains the behaviour of output when one input is varied. Other factors are constant. Proportion of change among factors varies. Also called as the Law of Variable Proportions or Law of Proportionality. 4/21/2020 2 The  law of variable proportions states that if the input of one resource is increased by equal increments 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 .

3. Meaning of Law of Returns The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative. 4/21/2020 3

4. Assumptions of Law of Variable Proportions Constant  State of Technology : First, the state of technology is assumed to be given and unchanged. If there is improvement in the technology, then the marginal product may rise instead of diminishing. Fixed Amount of Other Factors : Secondly, there must be some inputs whose quantity is kept fixed. It is only in this way that we can alter the factor proportions and know its effects on output. The law does not apply if all factors are proportionately varied. Possibility of Varying the Factor proportions : Thirdly, the law is based upon the possibility of varying the proportions in which the various factors can be combined to produce a product. The law does not apply if the factors must be used in fixed proportions to yield a product.

5. Three stages of the law First Stage: Law of increasing returns Second Stage: Law of constant returns Third Stage: Law of decreasing returns 4/21/2020 5

6. Law of increasing returns Addition of each successive unit of the variable input adds more to the total output than the previous unit. Each successive unit of variable input adds more and more to the total output. Curve obtained is convex to x-axis. Δ 1 Y 1 / Δ 1 X 1 < Δ 2 Y 2 / Δ 2 X 2 < Δ 3 Y 3 / Δ 3 X 3 4/21/2020 6

7. Law of Increasing Returns 4/21/2020 Urea (X) Output (Y) Δ X Δ Y Marginal Output ( Δ X /   Δ Y ) 1 3       2 8 1 5 5 3 15 1 7 7 4 23 1 8 8 5 35 1 12 12 7

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9. Law of Constant Returns Each successive unit of variable factor leads to equal quantity of additional output. Addition of each successive unit of variable factor adds same to the output. The curve obtained is linear to x-axis. Δ 1 Y 1 / Δ 1 X 1 = Δ 2 Y 2 / Δ 2 X 2 = Δ 3 Y 3 / Δ 3 X 3 4/21/2020 9

10. Law of Constant Returns 4/21/2020 Urea (X) Output (Y) Δ X Δ Y Marginal Output ( Δ X /   Δ Y ) 1 5       2 10 1 5 5 3 15 1 5 5 4 20 1 5 5 5 25 1 5 5 10

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12. Law of Decreasing Returns The addition of each successive unit of the variable factor adds less to the total output than the previous unit. Each successive unit of the variable factor adds less and less to the total output. Curve obtained is convex to x-axis. Δ 1 Y 1 / Δ 1 X 1 < Δ 2 Y 2 / Δ 2 X 2 < Δ 3 Y 3 / Δ 3 X 3 4/21/2020 12

13. Law of Decreasing Returns 4/21/2020 Urea (X) Output (Y) Δ X Δ Y Marginal Output ( Δ X /   Δ Y ) 1 15       2 27 1 12 12 3 35 1 8 8 4 41 1 6 6 5 45 1 4 4 13

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