law of variable proportion / law of diminishing retures
Law of variable proportions occupies an important place in economic theory. This law examines the production function with one factor variable, keeping the QUANTities of other factors fixed. In other words, it refers to the input-output relation when the output is increased by varying the QUANTity of one input. When the QUANTity of one factor is varied, keeping the QUANTity other factor constant, the proportion between the variable factor and the fixed factor is altered; the ratio of employment of the variable factor to that of the fixed factor goes on increasing as the QUANTity of the variable factor is increased. Under this law we study the effects on output of variations in factor proportions. The law of variable proportions is the new name for the famous “Law of Diminishing Returns” of classical economics.
Fig: Stages of the law of variable proportions
Figure Identification: Ox axis represents the amount of variable factor and oy axis represents the output.
1st Stage: All of TP, AP and MP increases. TP increases at an increasing rate to point f and after that point TP increases but at a decreasing rate and point f is the point of inflextion. The point of inflextion represents the different rate of change i.e. before this, the rate of activities increases in an increasing rate and after this point the rate of activities increases in a decreasing rate.
Corresponding to the point of inflexion MP is highest. At the end of 1st stage AP = MP where MP falls and intersect AP from up where AP is highest.
2nd Stage: At the 2nd stage TP increases but AP and MP fall. At the end of 2nd stage TP is highest and corresponding to it MP is zero.
3rd Stage: At 3rd stage all of TP, AP and MP fall and MP is negative here.
Law of variable proportions occupies an important place in economic theory. This law examines the production function with one factor variable, keeping the QUANTities of other factors fixed. In other words, it refers to the input-output relation when the output is increased by varying the QUANTity of one input. When the QUANTity of one factor is varied, keeping the QUANTity other factor constant, the proportion between the variable factor and the fixed factor is altered; the ratio of employment of the variable factor to that of the fixed factor goes on increasing as the QUANTity of the variable factor is increased. Under this law we study the effects on output of variations in factor proportions. The law of variable proportions is the new name for the famous “Law of Diminishing Returns” of classical economics.
Fig: Stages of the law of variable proportionsFigure Identification: Ox axis represents the amount of variable factor and oy axis represents the output.
1st Stage: All of TP, AP and MP increases. TP increases at an increasing rate to point f and after that point TP increases but at a decreasing rate and point f is the point of inflextion. The point of inflextion represents the different rate of change i.e. before this, the rate of activities increases in an increasing rate and after this point the rate of activities increases in a decreasing rate.
Corresponding to the point of inflexion MP is highest. At the end of 1st stage AP = MP where MP falls and intersect AP from up where AP is highest.
2nd Stage: At the 2nd stage TP increases but AP and MP fall. At the end of 2nd stage TP is highest and corresponding to it MP is zero.
3rd Stage: At 3rd stage all of TP, AP and MP fall and MP is negative here.
Relationship between TP, AP and MP:
TP increases in increasing rate before reaching to point of inflexion and after that point TP increases but at a decreasing rate. At this time AP and MP also increases and MP curve is higher than AP.
When AP is highest then AP = MP and TP increases at a decreasing rate.
Again when TP is highest then MP = O and AP decreases at that time.
Whenever MP increases AP also increases then MP curve is in the up of AP curve
When AP is highest then, AP = MP
When MP decreases, AP also decreases then MP curve is in lower position that AP curve.
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