Law of Variable Proportions
The Law of variable proportions is generally called as law of diminishing returns as the stage of diminishing returns has economic relevance. The law of diminishing returns states that as additional units of variable input are combined with a fixed input, the additional output (i.e., MP) initially increases at an increasing rate, then diminishing rate, eventually leading to a decline in the total product.
The pattern of change in TP, AP and MP represents this law. Table 5.2 shows that as additional units of laborers are employed during the year the AP increased consistently till 3 units due to proper utilization of plant capacity. This is so because initially the fixed factor is more than the variable factor. Specialization of labour and teamwork increases per unit output. But after the variable input becomes equal to fixed factor we get diminishing returns from the variable input. It becomes difficult to assign specialized tasks for each worker. Duplication of tasks eventually leads to a decline in the AP. Negative returns arise due to excessive variable factor in relation to fixed factor. The second worker added 10 more units of output to increase TP to 18 and AP to 9. When the 5th worker is employed the AP falls from 9.7 to 9.4 units.
Relationship between AP and MP can be used to define the three stages of production function. Slope of the TP rises to point A (point of inflexion) at an increasing rate. It becomes zero at point C' and negative thereafter. Thus, MPI rises till point A', is zero at C and negative afterwards. On the other hand, the slope of the ray gives the APL from the origin to the TP curve. The slope of the TP curve rises upto point B and falls thereafter but remains positive as long as TP is positive. Thus, APL rises till point B and falls thereafter.
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