Q.Critically examine the Law of Variable Proportions.
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Start your 14-day free trial to unlock the full solution →The Law of Variable Proportions explains short-run production: as units of a variable factor (say labour) are added to fixed factors (say land/capital), marginal product first rises (Stage I: increasing returns), then falls (Stage II: diminishing returns), and finally becomes negative (Stage III). A rational producer stays in Stage II. The law rests on assumptions (fixed technology, homogeneous variable factor, some fixed factor) and is criticised where those assumptions fail.
Meaning
The Law of Variable Proportions (also called the Law of Non-Proportional Returns) states that when more and more units of a variable factor are applied to a given quantity of fixed factors, the total product increases first at an increasing rate, then at a diminishing rate, and finally falls. It is a short-run law because at least one factor is fixed.
Assumptions
- The state of technology is given and constant.
- Only one factor is variable; the others are fixed.
- All units of the variable factor are equally efficient (homogeneous).
- The factors of production are not used in fixed proportions (they can be combined in varying ratios).
The three stages
| Units of labour | Total Product (TP) | Marginal Product (MP) | Average Product (AP) | Stage |
|---|---|---|---|---|
| 1 | 10 | 10 | 10 | I (increasing returns) |
| 2 | 24 | 14 | 12 | I |
| 3 | 39 | 15 | 13 | I |
| 4 | 50 | 11 | 12.5 | II (diminishing returns) |
| 5 | 56 | 6 | 11.2 | II |
| 6 | 57 | 1 | 9.5 | II |
| 7 | 57 | 0 | 8.1 | end of II |
| 8 | 54 | -3 | 6.75 | III (negative returns) |
- Stage I – Increasing returns: total product rises at an increasing rate, marginal product increases and reaches its maximum. This happens because the fixed factor is under-utilised and better division of labour becomes possible.
- Stage II – Diminishing returns: total product rises but at a diminishing rate, marginal product falls (but stays positive) and average product also falls. TP is maximum where MP = 0. This stage occurs because the fixed factor is now intensively used.
- Stage III – Negative returns: total product itself falls and marginal product becomes negative, because too many units of the variable factor crowd the fixed factor.
Why a producer operates in Stage II
Stage I is not sensible because the fixed factor is wasted (MP is still rising). Stage III is irrational because adding the factor actually reduces output. Hence the producer always operates in Stage II, where total product is maximised.
Critical examination
- The law is valid only when technology is unchanged; improved technology can postpone diminishing returns. …
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