Law of Variable Proportion

Subject – Managerial EconomicsSubmitted to – Prof. Gurpreet Arora

Prepared by- Abbas Miyajiwala

CONTENTS: Production Function Two Types of Production Function Two Types of Factor Inputs Total, Average and Marginal Product Assumption of the Law Three Stages of Production The Law of Variable Proportion

Production Function Production Function can be represented in

form of mathematical model of equation as

Q = f( a,b,c, ….., etc)

Here, Q is dependent variable which stands for Quantity of Output and a,b,c are independebt variables and various Factors of Inputs like Land, Capital, Labour, etc which are used in production.

Two types of Production function Short Run Long Run

Short Run Production Function

In this case, the producer will keep all his fixed factors constant and will only change a few variable factor inputs. For example, the Law of Variable Proportion.

Long Run Production Function In this case, the producer will

vary all his factor inputs both fixed as well as variable. For example, The Law of Returns to the scale.

Two types of Factor Inputs Fixed Input : Quantity of which remains

the same irrespective of level of output produced by the firm. For example, Land, Building, Machineries, etc.

Variable Inputs : Quantity of which varies the level of output produced by the firm. For example, Raw Materials, Power, Fuel, Transport , Labour, etc.

Total Product (TP) It refers to the total volume of

goods produced during a specified period of time.

Total Product(TP) can be raised only by increasing the quantity of variable factors employed in production.

Average Product (AP) Average Product can be known

by dividing total product by the total number of units of the variable factor.

TP/Q EG- 450/5 = 90

Marginal Product (MP) It is the output derived from the

employment of one additional unit of variable factor.

The rate at which the total product increases is known as marginal product.

Addition to the total product resulting from a unit increase in the quantity of the variable factor.

Three Stages of Production

TOTAL PRODUCT

WORKER

PR

OD

UC

T

1st STAGEIncreasing Returns

2ND STAGEDecreasing Returns

3RD STAGENegative Returns

AVEARGE PRODUCT

MARGINAL PRODUCT

Stage I (Increasing returns) Marginal product is increases throughout.

This means that every additional unit increases productivity as well as total output.

This is shown on the graph by an increasing slope of total Product curve.

Stage II (Diminishing returns) Marginal product decreases throughout.

This means that every additional unit decreases productivity, though total output still increases.

This is shown on the graph by a decreasing positive slope of total product curve.

Stage III (Negative returns) Marginal product is negative throughout. This means that each additional unit

actually decreases total output. A waste of money and resources. This is shown on the graph by a negative

slope.

Conclusions from the diagram The greatest productivity is at the end of

Stage I. The greatest output is at the end of Stage II. Therefore, Stage II is ideal because there

is a balance between productivity and total output.

Assumptions of the Law of Variable Proportion Only one factor is variable while others

are held constant. All units of variable factors are

homogeneous. There is no change in technology. It is possible to vary proportions in which

different inputs are combined. The products are measured in physical

units, i.e. in quintals, tonnes etc.

The Law of Variable Proportion “ In a given state of technology and

keeping other productive factors constant, additional units of a particular variable input will yield increasing returns of variable factor up to a point. Eventually a point is reached beyond which further additions of variable factor yield diminishing marginal returns per unit of input ”

Law of Variable Proportion It explains the relationship between factor

input and factor output in physical terms.

It helps in selecting the most ideal combination of factor inputs.

It is the new name for the famous “ Law of Diminishing Returns” by Classical Economists.

THANK YOU