Downloaded 34 times
Uploaded byMohammed Jasir PV
Law of variable proportion and law of return to scale
This document discusses production and the laws of variable proportions and returns to scale. It contains the following key points: 1. The law of variable proportions explains short-run production and states that as one variable input is increased while others stay constant, total output initially increases at an increasing rate, then at a diminishing rate, and may eventually decrease. 2. There are three stages: increasing, diminishing, and negative returns to the variable input. 3. The law of returns to scale explains long-run production when all inputs change proportionally. There can be increasing, constant, or decreasing returns to scale depending on if output increases more than, equal to, or less than proportional to the input increase
More Related Content
Similar to Law of variable proportion and law of return to scale
More from Mohammed Jasir PV
Law of variable proportion and law of return to scale
- 1. Production Law of VariableProportion Law of Return To Scale Prepared By: Mohammed Jasir PV Asst. Professor MIIMS, Puthanangadi Contact: 9605 69 32 66
- 2. Production Production is theprocess of converting input into output. Inputs Land Labour Capital Raw Materials Machines Outputs Goods & Services Transformation Process Production
- 3. Time horizon ofanalysis 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 maybe classified into two 1. Short-run production function:-which is explained by law of variable proportions. 2. Long-run production function:-which is explained by returns to scale
- 5. The Law ofVariable 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 LawOf Variable Proportion • Short-run • Constant Technology • Factor units are homogenous
- 10. This Law HasThree Stages 1. Stage Of Increasing Returns To A Factor 2. Stage Of Diminishing Returns To A factor 3. Stage Of Negative Returns To A Factor
- 11. • During thisstage 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
- 12. Stage II StageOf 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.
- 13. Stage III StageOf 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.
- 14. Causes of increasingreturns to a factor: • Fuller utilization of the fixed factor • Increased efficiency of variable factor • Better coordination between the factors
- 15. • Short-run ProductionFunction Law of Variable Proportion • Long-run Production Function Law of Returns To Scale OR Law Of Return To Factor
- 16. Law Of ReturnsTo 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.
- 17. Law Of ReturnsTo Scale
- 18. There are threecases 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
- 19. Stage II. Constantreturn 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%
- 20. 3. Decreasing returnsto 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%
- 21. The following tableexplains 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
- 22.