The Law of Variable Proportions & The Law of Diminishing Marginal Products.

The Law of Variable Proportions

& The Law of Diminishing

Marginal Products

Objectives

– To know about production function, TP AP and MP and various stages of production.

– To understand the differences between fixed proportion production function and variable proportion production function.

– TO develop the skill to draw diagram for law Variable proportion.

Introduction

• The Short Run & The Long Run

• Total Product

• Average Product

• Marginal Product

The Short Run & Long Run

Short Run

A firm cannot vary all the inputs.

The factor which cannot be varied is called Fixed Input

Other which can be varied is Variable Input

Long Run

Here all the input factors of production can be varied. Therefore no fixed input.

Total Product

Definition :-

For variable input the relationship between the variable input and output, keeping all other inputs constant.

TP = Production Function

q = f(x1; ¯x2)

Average Product

Definition:- The output per unit of variable

input.

AP = TP/x1 = f (x1; ¯x2) / x1

Marginal Product

Definition:-

The change in output per unit of change in the input when all the other inputs are held constant. When factor 2 is held constant, the marginal product of factor 1 is :

MP1 = change in output / change in input

= Δq / Δx1

Contents

• Introduction: - Meaning of production function.

• Statement of law given by Benham.• Assumptions of law.

• Only one factor input varies others remain constant.

• All the units of variable inputs are homogeneous.

• Technology remain the same.

Three stages of productionStage I: -

In this stage TP increase at an increasing rate, MP and AP also increase. Therefore this stage is an increasing stage.

Stage II: - In the IInd stage TP increases at a deceasing

rate, MP falls but positive AP also starts to fall. Therefore know as decreasing stage. The point at which TP start to increase at decreasing rate is known as point of inflexion.

Stage III:-TP, AP and MP fall in this stage. MP becomes

negative and therefore this stage is known as negative stage. The law can be explained with the help of following table and diagram.

LAND LABOUR TP AP MP CONCLUSIONS

1 ACRE 0 0 0 0

1 ACRE 1 4 4 4 IR

1 ACRE 2 10 5 6 IR

1 ACRE 3 15 5 5 DR

1 ACRE 4 17 4.2 2 DR

1 ACRE 5 17 3.4 0 NR

1 ACRE 6 15 2.7 -2 NR

Conclusions

• While adding units of an input (labor), the marginal product goes through three stages:

• Stage I (Increasing returns): marginal product 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.

Conclusions, cont.

• 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.• 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, cont.

• 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.

Summary

• The Law of Variable Proportions states that while varying only one input, output will go through three stages:– Increasing returns– Diminishing returns (ideal)– Negative returns

Methodology

• Discussion Method.

• Question answer method.

• Diagrammatic illustration.

• Introduction by asking questions and the answer production is a function of various factors of production i.e. Q.x = f (L, L, C, E)

References

• NCERT Text books.

• Microeconomics – K.K.Dewett

Assignments

– Define Consumption functions.– Distinguish between fixed proportion production

function and variable proportion function.– Explain Law of Variable Proportion.

OR

With the help of a suitable diagram explain the theory of returns to a factor.

– Which stage of production, a reasonable producer will select? Why?

Learning Outcome

• Children are able to understand the concepts like production, variable proportion production function and law of variable proportion. They are able to construct a schedule and draw diagram for law of variable proportion.

Value

The lesson will help the children to take rationale decisions in the future regarding the stages of production, if they become producers.

Presented by

Mrs. Geetanjali N Nagpal

PGT Economics

KV Bhandup, Mumbai.