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.
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