LAW OF CONSTANT RETURNS
There can be a situation whee neither the law of diminishing returns nor the law of increasing returns operates. but there is instead constant return..An industry is subject to the law of constant returns when. whatever the output or scale of production. the cost per unit remains unaltered, or increased investment of labour and capital results in a proportionate increase in the output. Marshall pointed out that the part played by nature corresponded to diminishing returns and the part played by man to increasing returns. That is why inagriculture. where nature is said to be supreme. there is diminishing return. In manufacturing industries. where man’s ingenuity has the fullest play in effecting all sorts of economies unhampered by external forces. there operates the law of increasing returns. It is conceivable that some industry may lie midway between the two. where neither there is diminishing return nor increasing return. but there is constant return. Think of an industry where the raw materials. representing nature’s part, account for the same proportion of the total cost as the manufacturing cost which is man’s part. In such a case, the law of constant return will operate.In every industy, the two opposite tendencies are at work. When it is expanded some costs rise and the others fall. It is possible that there may be an industry where these two tendencies just neutralise each other, and we have constant return. The example of an industrymaking blankets out of pure natural wool is sometimes given in this connection. It is said that the raw material (wool) is subject to diminishing returns.but this tendency is just counter-balanced by the economies in the manufacturing costs. and there is a constant return.
he concept of the optimum can help us to understandthe operation of the laws of returns. We have said that movement towards the optimum means in-creasing returns, and the m ovement beyond it the diminishingreturns. But, if we keep to the optimum, for however short a period it may be. we shall have constant returns.