Lecture-19 Theory of Production Learning Objective: Law of Variable Proportion

Lecture-19
Theory of production
Learning objective: Law of Variable Proportion,
This law states that as the proportion of factors is changed, the total production at
first increases more than proportionately, then equi- proportionately and finally
less than proportionately.
The classical economist called this as the Law of Diminishing Returns. They
derived it by applying more and more labour to a fixed acreage of land, and
thought of it as associated particularly with agriculture.
But it is general principle that can be applied to any production operation. It is
now usually called as Law of Variable proportions.
Assumptions: The law has following main assumptions
One of the factors is variable, while others are fixed.
All units of the variable factor are homogenous.
The technology of production is constant.
The factors of production can be used in different proportions.
Explanation of the law:
This law can be explained with the help of following table and figure.
Units of land
( Fixed input)
Units of labour
(Variable input)
Total
produc
t
(TP)
(1)
(2)
(3)
1
1
2
1
2
5
1
3
9
1
4
12
1
5
14
1
6
15
1
7
15
1
8
15
Suppose a farmer has one hectare farm
Marginal
Product
(MP)
Average
Product(AP)
(4)
3
4
3
2
1
0
0
and possess
(5)
2.0
2.5
3.0
3.0
2.8
2.5
2.1
1.8
all the inputs of
at increasing rate
at
rate
decreasing
production.
He wants to grow say tomato. He wants to decide about the number of labourers
to be used, keeping other factors constant. So as the number of labourers is
increased, the Total product, Marginal product and Average product is as shown
in the table. Column 1 of the table shows the fixed factor i.e. land, whereas
column 2 shows the variable factor labour. By using one more unit of labour
whatever addition is made to the total production is called marginal product.
(Column 4). Column 5 shows the average product.
The table shows that if increasing units of labour are added to a fixed quantity of
land, the total product first increases at increasing rate upto 3 units of labour
afterwards it increases at decreasing rate. When 6 units of labour are used the
total product is maximum. The marginal product of 7 th unit of labour is zero and
of 8th unit is negative. Average product of labour first increases and start the
declining
gradually. Average product becomes equal to marginal product, then
later starts declining. The same thing is shown in the figure as below.
Three Stages of Production: From the Table as well as figure, drawn above on the
assumption that production obeys the law of variable proportions, one can easily discern
three stages of production as shown in the table below.
Stages
Stage-1
Stage-11
Stage-111
Total Product
(TP)
Increasing
Increasing
Decreasing
Decreasing
Marginal Product
(MP)
Increasing
at Decreasing
Negative
Average Product
(AP)
Increasing
Decreasing
Decreasing
Stage of Rational Decision: In order to achieve maximum profits, the rational decision
of purely competitive firm will have to operate in stage -11. In stage-1, average returns to
the variable input are increasing but the fixed input is being used uneconomically. Hence,
as output increases, total profit also increases, thus the firm/farm will have an incentive to
produce more through stage -1. A rational firm/farm never operates in stage -11. In this
stage there is actual decline in the volume of the total production. In the words of
Ferguson, Even if the units of variable input were free, a rational producer would not
employ them beyond the point of zero marginal products because their use entails a
reduction in the total output.
Causes of Application of Law: This law operates because of the indivisibility of inputs,
change in their proportion and imperfect substitutes.
Indivisibility of inputs: The main cause of the stage of increasing returns is that
some inputs of production are indivisible. It means in order to produce goods up
to a given limit, at least one unit of the fixed is indispensable. In the initial stages
of production, fixed inputs (Land) remains underutilized and needs application of
variable input (labour). Moreover additional application of variable input
facilitates process based division of labour that raises the efficiency of this input.
It also tends to improve the degree of co-ordination between fixed as well as
variable inputs. Hence output increases at an increasing rate.
Change in input ratio: The main cause of decreasing returns is that one of the
inputs of production is variable, while other are fixed. When variable input is used
with fixed inputs, their ratio compared to variable input falls. Production is the
result of co-operation of all inputs. When as additional unit of variable input is

combined with the fixed relatively less units of fixed inputs, the marginal return
of variable input decline. For example in an area of 4 hectare 2 labourers are used
to fully utilize the area. If number of labourers is increased to say 4, the land to
labour ratio falls from 2:1 to 1:1. It is clear that one labour per hectare produces
less as compared to 2 per hectare. Hence marginal production of labour
diminishes.
Imperfect substitutes: According to Mrs. Joan Robinson, imperfect substitution
of inputs is mainly responsible for the operation of diminishing returns. Had
perfect substitution among the inputs been possible then after the optimum use of
fixed input, as the units of variable input are increased, the amount of fixed input
could be increased by making use of substitutes. But in real life inputs are
imperfect substitutes and hence one input cannot be substituted by another input
indefinitely.
Questions
1 When Average product is equal to marginal product then
a) First stage of production starts
b) Second stage of production starts
c) Third stage of production starts
d) None of the above
2___________ stage of production function is called rational stage
a) First
b) Second
c) Third
d) All of the above
3. Marginal product becomes negative in _______ stage of production
a) First
b) Second
c) Third
d) All of the above
4 Law of Variable proportions is generally applicable in
a) Industry
b) Agriculture
c) Both a and b
d) None of the above
5 The law of variable proportion is based on has following assumptions, which one is not
correct
a) One of the factors is variable, while others are fixed.
b) All units of the variable factor are homogenous.
c) The technology of production is constant.
d) The factors of production can be used in constant proportions

Answers
1 b)
2 b)
3 c)
4 b)
5 d)

Lecture-19 Theory of Production Learning Objective: Law of Variable Proportion

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Lecture-19

gradually. Average product becomes equal to marginal product, then

result of co-operation of all inputs. When as additional unit of variable input is

d) The factors of production can be used in constant proportions

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