1. LAWS OF DIMINISHING RETURNS (OR)
THE LAW OF VARIABLE PROPORTIONS

2. Introduction :
Law of variable proportion 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

3. When the quantity of one factor is varied, keeping the quantity of other factors 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. Since under this law , we study the effects on output variations in factor proportions, this is known as the law of variable proportions. The law of variable proportions is the new name for the famous “Law of Diminishing Returns” of classical economics.

4. Definitions
“The law of diminishing returns, as it usually, formulated states that with a fixed amount of anyone factor of production , successive increase in the amount of others will, after a point , yield a diminishing increment of output.” -Mrs. John Robbinson “An increase in some inputs relative to other fixed inputs will, in a given state of technology, cause output to increase; but after a point the extra output resulting from the same additions of extra inputs will become less and less.” -P. A. Samuelson

5. Assumptions of the Law of Variable Proportions
The state of technology is assumed to be given and unchanged.
There must be some inputs whose quantity is kept fixed.
Homogeneous nature of units of variable factor is assumed.

6. The law is based upon the possibility of varying the proportions in which the various factors can be combined to produce a product.
It is assumed that units of variable factor are divisible into small homogeneous units. This assumption may not always be true.
While discussing the law of returns money and monetary value of output is not at all taken into consideration.

7. Total Physical Product :Total quantity of output produced in physical units by a firm during a period of time.
TP= f (TVF)
Marginal Product : The change in total product caused as a result of one additional unit of variable factor employed in combination with fixed factors is called marginal product.
MP= TPn – TPn-1 .

8. Average Product : It is the total product that a firm produces in a given time period divided by the quantity of variable factor that is used to produce it. TP
AP=
TVF

9. Fixed Factor Variable Factor Total Product (units) Average Product
Marginal Product
Stages F 1 6 2 16 8 10
I STAGE 3 30 14 4 40 5 45 9
II STAGE 48 7
6.8 44
5.5 -4
III STAGE 36
4.2 -6

10. Observations of the table
As long as A.P. is rising, M.P. would be larger than the average product.
M.P. is less than A.P., when A.P. is decreasing.
The A.P. remains constant when M.P. and A.P. are equal. Also, when A.P. is maximum M.P. equals A.P.
Total Product is maximum when M.P. is zero.
M.P. becomes negative when T.P. falls.

11. When 1 to 3 units of TVF are employed, M. P. goes on increasing
When 1 to 3 units of TVF are employed, M.P. goes on increasing. This is the phase of ‘Increasing Returns’.
When 4, 5 and 6 TVF are employed we notice that in their case M.P. is decreasing. This is the phase of ‘Constant Returns’.
From 7 to 9 units of TVF, it is noticed that T.P. is decreasing while M.P. is negative. This is the phase of ‘Diminishing Marginal Returns’. .

12. Stage I Stage II Stage IIIY TP
Stage I Stage II Stage III
OUTPUT a
O P Q R AP
O S T U X
UNITS OF VARIABLE INPUT MP

13. Under which stage Production work is Advantageous
Practicability of Law of Variable Proportions

14. Importance of Law of Variable Proportions
Fundamental Law of Economics,
Basis of Malthusian Population Theory,
Basis of Recardian Rent Theory,
Basis of Marginal Productivity Theory,
Affects Standard of Living of People Residing in an area,
Incentive for Inventions.

15. Limitations of The Law
1- New Methods of Cultivation, 2- New Soil, 3- Insufficient Capital, 4- Application of the Law of Diminishing Returns, 5- In case of Inventions, 6- Population Growth.

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