Economic Implications of the Law of Variable Proportions

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Economic Implications of the Law of Variable Proportions

The law of variable propoi tions (of which the law of diminishing returns is one aspect) shows the efficiency  of factor combination. Incidentally, the threeMages of the law of diminishing returns shown above throw light on how efficiently have the [actors (land But when it enters the second st age, it finds that the return per unit expenditure on labour decreases while that of land increases. The proportions in which land and labour will be used will depend on their relative prices or costs per unit. If the price of land is low  relative to the price of labour, the firm will operatemore in the beginning of stage II, and, conversly, less the price of labour relative to the price of land, it will operate towards the end of the stage II. Stages I and III are ruled out. Stage I is ruled out because throughout this stage average product of both lqnd and labour are still increasing and stage 111 is ruled out becasue the average product of both factors is decreasing.

applies everywhere and which is property called the Law of Variable Proportions. This law operates in all industries, although its different stages are to be found in different industries or its different stages are larger or shorter in different industries. In some industries, the stage of increasing marginal return finishes earlier and diminishing marginal return starts as in agriculture and, in some other industries, the stage of increasing marginal return is so long that the marginal return starts diminishing only when the scale of production is unduly enlarged as in the case of almost all manufacturing industries. The Law of Variable Proportion occupies a very important place in economic theory. It describes the production function with one variable factor while the quantities of other factors of production are fixed. That  is, it describes the input-output relation in a situation when the output is increased by increasing the quantityof one input, keeping the other inputs constanL When the quantity of one factor is increased and the quantities of the other factors of production are ept constant, naturally the proportion between the ,..anable factors  and the fixed factor is altered, That is, the ratio of thevariable factor to that of the fixed factor goes on increasing as a quantity of the variable factor is increased. It is because that in this la w e tudy the Law of Variable Proportions. This law operates in all industries, although its different stages are to be found  in different industries or its different stages are largeror shorter in different industries. In some industries, the stage of increasing marginal return finishes earlier and diminishing marginal return starts as in agriculture and, in some other industries, the stage of increasing marginal return is so long that the marginal return starts  diminishing only when the scale of production isunduly enlarged as in the case of almost all manufacturing industries. The Law of Variable Proportion occupies a very important place in economic theory. It describes the production function with one variable factor while the qua tities of other factors of production are fixed. That is, it describes the input-output relation in a situation
when the output is increased  by increasing the quantityof one input, keeping the other inputs constanL When the quantity of one factor is increased and the quantities of the other factors of production are ept constant, naturally the proportion between the ,..anable factors and the fixed factor is altered, That is, the ratio of the variable factor to that of the fixed factor goes on increasing as a quantity of the variable factor is  increased. It is because that in this la w e tudy theMarshall, it was thought that there were three separate laws of production, viz., the laws of diminishing, increasing and constant returns. The modern economists are of the view that these three laws are ‘not three separate laws but are only three phases of
one general law of variable pr oportions.The law of variable proportions has been
variously stated by the economists. In th e words ofStigler, “As equal increments of one input are added, the inputs of other productive services being held constant, beyond a certain point the result in increment of product will decrease, i.e., the marginal product will diminish.’? Professor Samuelson states the law thus, “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 thesame additions of extra inputs will become Icss and less.’? Professor Benham also states the law almost in similar words, “As the proportion of one
factor in a combination of f ctors is increased, after a point, first the marginal and then the averag,e product of that factor will . It will be seen that these statements are really  statements of the law of diminishing returns whichshould be considered as an old name for the new law of variable proportions. Prof. Boulding considers that the expression ‘diminishing returns’ is a loose.He, therefore, called it the law of Eventually – / ishing Margina1 Physical P roductivity. He defines thelaw thus, “As we increase the  of anyone input which is cumbined with a fixed quantity of other  inputs the marginal physical productivityof the variable input must eventually  declinc.!Thus, we find from the statements  of the law of variablepropotions given above that this law relates to the behaviour of output as the quantity of one factor is varied keeping the quantities of the other factors constant. It states furthe r thatthe marginal product and the average product of the kept constaur will  diminish .

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Economic Implications of the Law of Variable Proportions