The laws of
production describe the technically possible ways of increasing the level of
production. Output may increase in various ways. Changing all factors of production
can increase output. Clearly this is possible only in the long run. Thus the
laws of returns to scale refer to the analysis of production in the long run.
In the short run output may be increased by using more of the variable
factor(s) while capital (and possibly other factors as well) are kept constant.
The marginal product of the variable factor(s) will decline eventually as more
and more quantities of variable factor are combined with the constant factors.
The increase of output with one factor (at least) constant is described by the
law of (eventually) diminishing returns of the variable factor, referred to as
the law of variable proportions.
Production in the Short Run: Production function describes the functional relationship between inputs and output. With a given production function, the technological relationship between additional dozes of inputs and the additional resultant output can be easily found out. The theory of production studies the input- output relationship under (a) short term and (b) long term. In the short run, the production function is studied with one variable input (labour), other input (capital) remaining fixed. In the long run the input-output relationship is studied with all inputs subject to variation. If all inputs of a firm are held constant and only the labor input varies, then any change in output is achieved with the help of changes in the amount of labor used. When the firm changes the amount of labor only, it changes the proportion between the fixed input and variable input. As the firm goes on changing this proportion by changing the amount of labor, it experiences the Law of Variable Proportions. It is also called the Law of Diminishing Returns..The law of variable proportion shows the efficiency of factor combination and tells us how the total output or marginal output is affected by a change in the proportion of the factors used. It describes the input-output relation in a situation when increasing the quantity of one input, keeping the other inputs constant, increases the output. When the quantity of one factor is increased and the quantities of the other factors of production are kept constant, the proportion between the variable factors and the fixed factor is changed. The ratio of the variable factor to that of the fixed factors goes on increasing as the quantity of the variable factor is increased. The economists have variously stated the law of variable proportions. As equal increments of variable input are added, the inputs of other factors being held constant, beyond a certain point the increase of product will decrease i.e., the marginal product tends to diminish. An increase in variable inputs relative to other fixed inputs will, in a given state of 'technology, results in increase of output but after a point the increase in output resulting from the same additions of extra inputs will become start declining. The law of variable proportions is illustrated with the help of data presented in Table 1 and Figure. Assuming that there is given fixed amount of land with which more variable factor is used to produce output. Table 1
The law states that as a lot of the variable input is used, all different inputs remaining constant, a point will eventually be reached wherever further quantities of varied input can yield decreasing marginal contributions to total product. Normally if one of the factors of production (usually capital K) is fixed, the marginal product of the variable factor can diminish after a certain range of production. The marginal product drops off quicker than the average. The marginal product of any amount of the variable input depends on the state of technology and therefore the amounts and qualities of the fixed inputs. With improved knowledge of methods of production, and better instrumentation marginal product would increase. Even with such changes, after some point, total product would grow at a slower rate and marginal product would grow at a slower rate and marginal product would diminish.
The Three Stages :The complete development of the law of variable proportions consists of three stages. Within the first stage, average product per employee will increase. The boundary of Stage I is where marginal and average products are equal and where average product is at a maximum. In the second stage, the total product continues to extend, but at a decreasing rate. The maximum right boundary of the second stage is where the total product is largest and therefore the marginal product is zero. During this stage each average and marginal products are declining. Marginal product, being below the average product, draws the average product down.
In the third stage, the variable factor is just too abundant relative to the fixed factor. This is often the stage of negative returns since the marginal product of the variable factor is negative and therefore the total product is diminishing
Rational producers continually select a volume of production in stage 2, and never operate in stage 3, because he or she would be producing less and would be using more units of the variable inputs. In stage 3, there is an excessive amount labor, in an absolute sense. The boundary between stage 2 and 3 therefore marks one limit of the range of rational production decisions. The other boundary is between stages 1 and 2 where average product could a highest.
A rational producer concentrates on the ranges of output over that the marginal products of the factors are positive however diminishing. The ranges of increasing returns to a factor and the range of negative productivity do not seem to be equilibrium ranges of output.
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