LAW OF VARIABLE PROPORTION. The law of variable proportion, also known as the law of diminishing marginal productivity states that if one factor of production is continuously increased by a constant amount,
while other factors are held fixed in quantity, then, after a certain point, the resulting increases in output will begin to diminish.
In other words, the law of variable proportions holds that if increasing quantities of one factor are combined with a fixed supply of others in production, a point is reached from which each extra variable factor added yields less and less addition to the total output.
That is as more and more of the variable factor is combined with a fixed quantity of other factors, ultimately, its average product and marginal product will begin to decrease.
This can be explained by stating that the fall off in extra additions to output do occur because each extra dose of the variable factor must now work with decreasing proportions of the fixed factors.
It must be understood that this fall off does not happen abruptly. As the variable input increased, the more natural outcome is that the increments to product will initially increase, then remain constant, and finally, begin to decrease, thereby given rise to:
1. Increasing returns, 2 returns, and 3. Diminishing returns
increasing returns experienced at stage 1. As more variable factor, labour in this case, are used, total product begins to increase, the average increases to its maximum, while the product attains a maximum and then
From table 22.3, constant returns are experienced at stage 2. The total product rises to its peak, the average product begins, and the marginal product reduces towards zero.
diminishing experienced in stage 3. At this stage total and average product fall towards zero
while the marginal product becomes having fallen below the horizontal axis, if shown graphically.
it becomes very clear that constant returns is merely a transitory stage being encountered as output shifts from the still highly temporary stage of increasing returns to the more dominant and diminishing returns.
|Variable factor labour||Fixed factor land||TP||AP TP/L||MP||Type of returns|
|1 2 3||10 10 10||30 120 240||30 60 80||30 90 120||Increasing|
|4 5||10 10||320 400||80 80||80 80||Constant|
|6 7 8||10 10 10||420 420 400||70 60 50||20 0 20||Decreasing or diminishing|
Importance of the law of variable proportions
The law of variable proportions is useful in the wing ways As business houses are assumed to be out to raise their profits to a maximum, it helps the entrepreneur to determine the optimal combination of factors to achieve this objective.
It becomes in very useful in fixing a worker’s wages, since a worker ought to be paid according to his marginal productivity.
A firm grasp of the law of variable proportions is essential to understand short-run cost curves and hence, the short-run theory of the firm.Related Posts