Q.Explain the law of variable proportions in production. Or State the merits of internal economies of large scale production.

The law of variable proportions describes how, holding some factors fixed, successively adding units of a variable factor first raises, then lowers, and finally can make negative the marginal product of that factor — shown in three stages. Internal economies of scale are cost advantages a firm gains purely from growing bigger, independent of the industry as a whole.

Main question — law of variable proportions: When a firm combines a variable factor (e.g., labour) with at least one fixed factor (e.g., land or capital) in the short run, holding technology constant, the behaviour of output as more units of the variable factor are added passes through three distinct stages:

• Stage I (Increasing returns to the variable factor): As the first few units of labour are added to a fixed amount of land/capital, marginal product rises — because the fixed factor was being underutilised and extra labour allows better division of work and fuller use of the fixed factor.
• Stage II (Diminishing returns to the variable factor): Beyond a point, each additional unit of labour adds less extra output than the previous unit, because the fixed factor becomes increasingly scarce relative to the growing labour force. Marginal product keeps falling but remains positive, and total product keeps rising (at a decreasing rate). A rational producer operates in this stage.
• Stage III (Negative returns): If labour is increased further still, workers begin to get in each other's way (overcrowding on a fixed plot/plant), and marginal product turns negative — total product itself starts falling.

Or alternative — internal economies of scale: These are cost advantages a firm secures purely by expanding its OWN scale of operation (regardless of what happens to the rest of the industry):

• Technical economies — larger firms can use bigger, more specialised and efficient machinery, and make fuller use of capacity. …