In order to increase the output, producers reduce the amount of variable factor. In this stage, there is a decline in total product and the marginal product becomes negative. Producers do not like to operate in Stage III either. Hence, the producer would prefer to not stop in Stage I but will try to expand further. Therefore, the producer can employ more units of the variable to efficiently utilize the fixed factors. In this stage, the marginal product increases with an increase in the variable factor. Learn more about Returns to Scale here in detail Significance of the three stagesĪ producer does not operate in Stage I. In this example, Stage III runs between seven to eight units of labour (from the point M onwards). Therefore, it is called the stage of negative returns. Stage III – Now, the TPP starts declining, MPP decreases and becomes negative.This stage reaches a point where TPP is maximum (18 in the above example) and MPP becomes zero (point R). In this example, Stage II runs between four to six units of labour (between the points L and M). Hence, it is called the stage of diminishing returns. Further, the MPP decreases with an increase in the number of units of the variable factor. Stage II – The TPP continues to increase but at a diminishing rate.In this example, the Stage I of the law runs up to three units of labour (between the points O and L). Therefore, it is also called the stage of increasing returns. The MPP increases with an increase in the units of the variable factor. Stage I – The TPP increases at an increasing rate and the MPP increases too.The law has three stages as explained below: Watch Videos on Law of Constant Proportion – Three Stages of the Law In order to make a simple presentation, we draw a Total Physical Product (TPP) curve and a Marginal Physical Product (MPP) curve as smooth curves against the variable input (labour). The following diagram explains the law of variable proportions. The table shows the different amounts of output when you apply different units of labour to one acre of land which needs fixing. In this example, the land is the fixed factor and labour is the variable factor. Let’s understand this law with the help of another example: Therefore, as you can see, the law analyses the effects of a change in the factor ratio on the amount of out and hence called the Law of Variable Proportions. ![]() Now, if you keep the land constant but increase the units of labour to 2, the land-labour ratio becomes 5:1. Therefore, the land-labour ratio is 10:1. Let’s say that you have 10 acres of land and 1 unit of labour for production. Let’s look at an example to understand this better: Why is it called the Law of Variable Proportions?Īs one input varies and all others remain constant, the factor ratio or the factor proportion varies. Learn more about Production Function here in detail The law states that keeping other factors constant, when you increase the variable factor, then the total product initially increases at an increases rate, then increases at a diminishing rate, and eventually starts declining. ![]() This relationship is also called returns to a variable factor. This is assuming that all other factors are constant. In other words, the law exhibits the relationship between the units of a variable factor and the amount of output in the short-term.
0 Comments
Leave a Reply. |