LAW OF VARIABLE PROPORTIONS : THEORY OF PRODCUTION 2

•    LAW OF VARIABLE PROPORTIONS
DETAILED LECTURE
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•    SHORT RUN PRODUCTION FUNCTION

•    RETURNS TO FACTOR

•    MICRO ECONOMICS

•    BY DR. SHASHI AGGARWAL

•    TIME PERIOD

1.       SHORT RUN IS DEFINED AS THAT PERIOD OF TIME IN WHICH ONE OR MORE FACTORS OF PRODCUTION OR INPUTS ARE FIXED AND OTHER ARE VARIABLE

2.       IN SHORT RUN THERE ARE BOTH VARIABLE INPUTS AND FIXED INPUTS

3.       IF PRODUCER WANTS TO EXPAND OUTPUT HE CAN DO SO BY USING MORE RAW MATEIALS AND HOURS OF LABOUR SERVICE WITH THE EXISTING PLANT AND MACHINERY AND VICE VERSA

4.       IN THE SHORT RUN PRODUCTION FUNCTION ( TECHNOLOGICAL REALTION BETWEEN THE INPUTS AND OUTPUTS DESCRIBED THE RESTRICTED CHOICE OPEN TO FIRM SINCE SOME OF THE FACTORS ARE FIXED AND SOME ARE VARIABLE.

5.       IN THE SHORT RUN IT IS POSSIBLE TO INCREASE THE QUANTITIES OF ONE INPUT WHILE KEEPING THE QUANTITIES OF OTHER INPUTS CONSTANT IN ORDER TO HAVE MORE UNITS OF OUTPUT. IT IS KNOWN AS LAW OF VARIABLE PROPORTION WHEN A PRODUCER BRINGS CHANGES IN HIS PRODUCTION BY CHANGING ONLY ONE FACTOR OF PRODUCTION AS RESULT THERE IS CHANGE IN THE PROPORTIONS OF COMBINATION OF FACTORS OF PRODUCTION THEN THIS PROPORTIONAL RELATIONSHIP BETWEEN OUTPUT AND INPUTS IS REFERRED TO LAW OF RETURN TO A FACTOR

•    LONG PERIOD

1.       LONG PERIOD IS DEFINED AS THAT PERIOD OF TIME IN WHICH ALL FACTOR OF INPUTS ARE VARIABLE

2.       LONG PERIOD REFERS TO THAT PERIOD OF TIME IN WHICH THE QUANITITY OF ALL FACTORS CAN BE INCREASED OR DECREASED

3.       LONG PERIOD IS ASSCCIATED WITH THE CHANGES IN THE SCALE OF PRODUCTION BUT THE TECHNOLOGY OF PRODUCTION IS ASSUMED TO BE CONSTANT

•    CONCEPTS

1.       TOTAL PRODUCT:- IS THE OVERALL QUANTITY OF OUTPUT THAT A FIRM  PRODUCES.

2.       AVERAGE PRODUCT :- IS DEFINED AS THE  AVERAGE PRODUCT PRODUCED BY EVERY WORKER. AP =TOTAL PRODUCT/VARIABLE INPUTS. IT IS THE QUANTITY OF TOTAL OUTPUT PRODUCED PER UNIT OF VARIABLE INPUT, HOLDING ALL OTHER INPUTS FIXED.

3.       MARGINAL PRODUCT OF AN INPUT ( FACTORS OF PRODUCTION) IS THE CHANGE IN OUTPUT RESULTING FROM EMPLOYING ONE MORE UNIT OF A PARTICULAR INPUT.MP =TP_N-TP_N-1

•    PRODUCTION FUNCTION

•    RETURN TO FACTOR OR PRODUCTION WITH ONE VARIABLE INPUT

1.       A PRODUCER MAY AFFECT A CHANGS IN HIS PRODUCTION BY CHANGING ONLY THE VARIABLE FACTOR,OTHER FACTORS AND TECHNOLOGY REMAINING CONSTANT.

2.       THE PROPORTIONAL RELATIONSHIP BETWEEN PRODUCTION AND VARIABLE FACTORS OF PRODUCTION IS TERMED AS RETURN TO FACTOR

•    RETURN TO FACTOR SHOWS THESE THREE PHASES:

1.       INCREASING RETURN TO A FACTOR:-INITIALLY TOTAL PRODUCTION RISES AT INCREASING RATE

2.       CONSTANT RETURNS TO A FACTOR:-RISES AT CONSTANT RATE

3.       DIMINISHING RETURN TO FACTOR:-TP INCREASES AT DIMINISHING RATE

•    HOW TO WRITE THE QUESTION IN THE QUESTION PAPER

•    DISCUSS THE LAW OF VARIABLE PROPORTION?

•    ANSWER STEPS:-

1.       MEANING OF SHORT RUN

2.       GENERAL MEANING AND DEFINITION OF THE LAW OF VARIABLE PROPORTION

3.       ASSUMPTIONS

4.       EXPLANATION IN TABULAR FORM

5.       EXPLANTION OF THE GRAPH

6.       RATIONAL DECISION

7.       CAUSES BRIEFLY

•    LAW OF VARIABLE PROPORTIONS

•    IN SHORT PERIOD, WHEN ONE INPUT IS VARIABLE AND ALL OTHER INPUTS ARE FIXED, THE FIRM’S PRODUCTION FUNCTION EXHIBITS THE LAW OF VARIABLE PROPORTIONS. HERE THE PROPORTION BETWEEN FIXED AND VARIABLE FACTORS IS CHANGED AND THE LAW OF VARIABLE PROPORTION SET IN.

1.       THE LAW STATES THAT AS THE QUANTITY OF A VARIABLE FACTOR IS INCREASED BY EQUAL DOSES ,

2.       KEEPING THE QUANTITIES OF OTHER FACTORS CONSTANT

3.       THE TOTAL PRODUCTION AT FIRST INCREASE MORE THAN PROPORTIONATELY,

4.       THEN EQUI PROPORTIONATELY AND FINALLY LESS THAN PROPORTIONATELY.

•    DEFINITION

•    LEFTWITCH ,” THE LAW OF VARIABLE PROPORTIONS STATES THAT IF THE INPUTS OF ONE RESOURCE IS INCREASED BY EQUAL INCREMENTS PER UNIT OF TIME, WHILE THE OTHER INPUTS OF OTHER RESOURCES ARE HELD CONSTANT, TOTAL OUTPUT WILL INCREASE, BUT BEYOND SOME POINT ,THE RESULTING OUTPUT INCREASES WILL BECOME SMALLER AND SMALLER.

CLAVO AND WAUGH,” THE LAW OF VARIABLE PROPORTION STATES THAT IF A VARIABLE QUANTITY OF ONE RESOURCE IS APPLIED TO A FIXED AMOUNT OF OTHER INPUTS,OUTPUT PER UNIT OF VARIABLE INPUT WILL INCREASE BUT BEYOND SOME POINT THE RESULTING INCREASE WILL BE LESS AND LESS  AND WITH TOAL OUTPUT REACHING A MAXIMUM BEFORE IT FINALLY BEGINS TO DECLINE

•    ASSUMPTIONS

1.       ONE OF THE FACTORS IS VARIABLE WHILE ALL OTHER FACTORS ARE FIXED.

2.       ALL UNITS OF THE VARIABLE FACTORS ARE HOMOGENEOUS

3.       LEVEL OF TECHNOLOGY AND METHODS OF PRODUCTION ARE CONSTANT.

4.       IT IS A SHORT PERIOD OPERATION

•    EXPLANATION

•    EXPLANATION

1.       FIRST STAGE:- TOTAL PRODUCT INCREASES AT INCREASING RATE . MP AND AP INCREASE IN THE BEGINNING STAGE, REACH MAXIMUM AND THEN START DECLINING. AND WHEN AP IS MAXIMUM THEN IT IS EQUAL TO MP. STAGE RELATES TO INCREASING AVERAGE RETURNS.

2.       SECOND STAGE :- TP INCREASES AT DECREASING RATE AND END OF STAGE IT BECOMES CONSTANT AND AP AND MP ALSO DECREASE AND MP AT THE END OF THE STAGE IT BECOMES ZERO

3.       THIRD STAGE :- TP STARTS DECLINING AND MP BECOMES NEGATIVE AND AP ALSO FALLS.

•    DIAGRAM

                                                         

•    DIAGRAM

•                        

•    EXPLANATION

•    DURING THE FIRST STAGE ,THE MARGINAL OUTPUT RISES AND ULTIMATELY BEGIN TO FAIL. THE AVERAGE PRODUCT RISE AND BECOMES CONSTANT IN THE END OF THE FIRST STAGE AND BECOMES EQUAL TO MP AND SECOND STAGE MP BECOMES ZERO AND AP STARTS FALLING AND IN THIRD STAGE MP BECOMES NEGATIVE AND TP STARTS DECREASING AND AP ALSO FALLS . THIRD STAGE IS KNOWN AS “ECONOMIC ABSURDITY OR ECONOMIC NONSENSE. A RATIONAL PRODUCER WILL PRODUCE UPTO SECOND STAGE AND IT WILL NEVER PRODUCE IN THIRD STAGE.

•    STAGE OF RATIONAL DECISION

•    IN ORDER TO ACHIEVE  MAXIMUM PROFITS,THE RATIONAL DECISION OF THE PURELY COMPETITIVE FIRM WILL BE TO OPERATE IN STAGE II

•    FIRM WILL OPERATE NETHER IN STAGE I NOR IN STAGE III

•    ACTUAL VOLUME OF PRODUCTION IN STAGE II WILL DEPEND ON THE PRICES OF INPUT AND OUTPUT

•    CAUSES

1.       INDIVISIBILITY OF FACTORS

2.       DIVISION OF LABOUR

3.       IMPERFECT SUBSTITUTE

4.       CHANGE IN FACTOR RATIO

•    POSTPONEMENT OF THE LAW

1.       BY IMPROVING TECHNOLOGY

2.       WHEN THE FACTORS OF PRODUCTION ARE PERFECTLY SUBSTITUTE

•    UNIVERSALITY OF THE LAW

•    IN THE WORDS OF MARSHALL  ,” THE PART PLAYED BY NATURE CONFORMS TO DIMINISHING RETURNS WHILE THE PART WHICH MAN PLAYS CONFORM TO INCREASING RETURNS.