question_answer

Giving reasons, explain the 'Law of Variable Proportions'.

Answer:

The Law of Variable Proportions states that if more and more of variable factor (labour) is combined with the same quantity of fixed factor (capital), then initially the total product will increase but gradually after a point, the total product will become smaller and smaller. MP of variable factor may initially rise but eventually a situation will come when MP of variable factor starts declining. It may go to zero or even negative.

In the upper panel, TP is the Total Product curve. In the lower panel, AP represents the Average Product curve and MP represents the Marginal Product curve. According to the Law of Variable Proportions, the whole production phase can be distinguished into three different production stages.

Ist Stage: Increasing Returns to a Factor: During this phase, TP curve increases at an increasing rate and is also accompanied by rising MP curve in the lower panel. TP continues to increase at an increasing rate till point K (inflexion point). Corresponding to the inflexion point, K, the MP curve attains its maximum point (U). Throughout this stage, the marginal product of labour is rising which implies that production (or total product) can be increased by employing more units of labour. The first stage of production is also known as non-economic zone as a rational producer will not operate profitably in this stage.

Reasons for Increasing Returns to a Factor

1. Underutilisation of the fixed factor: In the first stage of production, there are not enough labour units to fully utilize the fixed factor. Therefore, the firm can increase its output just by combining more and more of labour inputs with the fixed factor, thereby; the output of the additional unit of labour (i.e., MP) tends to rise.

2. Division of labour: The increase in the labour input enables the division of labour, which further increases the efficiency and productivity of the labour.

3. Specialisation of labour: Due to the division of labour, specialization of individual labour unit increase, which in turn raises the overall efficiency and productivity. Consequently, the MP curve rises and TP curve continue to rise.

IInd Stage: Diminishing Returns to a Factor In this stage the TP curve increases but at a decreasing rate and attains its maximum at point B, where it remains constant. On the other hand, in the lower panel, the MP curve continues to fall and cuts AP from its maximum point Z, where MP equal AP. When TP attains its maximum point, corresponding 10 it, MP becomes zero. AP, in this stage initially rises, attains its maximum point at Z and thereafter, starts falling. This stage is known as the economic zone as any rational producer produces in this stage.

Reasons for Decreasing Returns to a Factor

1. Full utilization of fixed factor: In this stage, the fixed factor is utilized to its maximum level as more and more of labour inputs are employed.

2. Imperfect substitutability between labour and capital: The variable factors are imperfect substitute for the fixed factor. Therefore, the firm cannot substitute labour for capital and as a result diminishing returns takes place.

3. Optimum Proportion/Ideal Factor Ratio: The optimum proportion (or ideal factor ratio) is a fixed ratio in which the labour and capital inputs are employed. These factors will be the most efficient if they are employed as per the optimum proportion. If this proportion is disturbed (by combining more of labour inputs to the fixed units of capital), then the efficiency of the factors will fall, thereby to the diminishing returns to the factor.

IIIrd Stage; Negative Returns to a Factor: This stage begins from the point B on the TP curve. Throughout this stage, TP curve falls and MP curve becomes (crosses the \[x\]-axis) negative. Simultaneously, the AP curve continues to fall and approaches the x-axis (but does not touch it). This stage is also known as non-economic zone as any rational producer would not operate in this zone. The addition to the total output in this stage by the additional labour unit (i.e. marginal product) is negative. This implies that employing more labour would not contribute anything to the total product but will add to cost of the production in form of additional wage.