LAW OF INCREASING RETURNS

Another aspect of the universal law of variable proportions is the law of increasing returns. An industry is subject to the law of increasing returns if extra investment in the industry is following by more than proportionate returns, i.e, if the marginal product increases.  In terms of cost, the law of increasing returns means the lowering of the marginal costs as industry is expanded. As marginal cost indicates price, we can say that-the law of increasing returns operates in an industry if, with every expansion of its output, the price  of product falls. These two laws of increasing and diminishing returns can also be explained in terms of the optimum . unit. We shall have increasing returns when .

Right Combination. The law of diminishing returns operates when the factors have been combined in wrong proportions. Now when we try to correct the combination, increasing returns will follow till the balance is completely restored. Full Use of Indivisible Factors. The concept of indivisibility. too, has a close bearing on the law of increasing returns. A manufacturer sets up a plant to cope with a peak demand. but in actual practice it may be producing below capacity. In that case. if an addition
is made to some other factor or factors. the indivisible factor will be more fully employed. and increasing returns will follow.