Explain law of variable proportion? What are its different stages? In which stage rational producer will operate
Answers
The law of variable proportion states that if the inputs of one resource is increased by equal increment per unit of time while the inputs of other resources are held constant, total output will increase, but beyond some point the resulting output increases will become smaller and smaller.
Law of variable proportions is based on following assumptions:
(i) Constant Technology:
The state of technology is assumed to be given and constant. If there is an improvement in technology the production function will move upward.
(ii) Factor Proportions are Variable:
The law assumes that factor proportions are variable. If factors of production are to be combined in a fixed proportion, the law has no validity.
(iii) Homogeneous Factor Units:
The units of variable factor are homogeneous. Each unit is identical in quality and amount with every other unit.
(iv) Short-Run:
The law operates in the short-run when it is not possible to vary all factor inputs.
Three Stages of the Law:
1. First Stage:
First stage starts from point ‘O’ and ends up to point F. At point F average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate up to point E. between ‘E’ and ‘F’ it increases at diminishing rate. Similarly marginal product also increases initially and reaches its maximum at point ‘H’. Later on, it begins to diminish and becomes equal to average product at point T. In this stage, marginal product exceeds average product (MP > AP).
2. Second Stage:
It begins from the point F. In this stage, total product increases at diminishing rate and is at its maximum at point ‘G’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘C’. Average product is maximum at point ‘I’ and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP < AP).
3. Third Stage:
This stage begins beyond point ‘G’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. Law of diminishing returns firmly manifests itself. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only.
In Which Stage Rational Decision is Possible:
To make the things simple, let us suppose that, a is variable factor and b is the fixed factor. And a1, a2 , a3….are units of a and b1 b2b3…… are unit of b.
Stage I is characterized by increasing AP, so that the total product must also be increasing. This means that the efficiency of the variable factor of production is increasing i.e., output per unit of a is increasing. The efficiency of b, the fixed factor, is also increasing, since the total product with b1 is increasing.
The stage II is characterized by decreasing AP and a decreasing MP, but with MP not negative. Thus, the efficiency of the variable factor is falling, while the efficiency of b, the fixed factor, is increasing, since the TP with b1 continues to increase.
Finally, stage III is characterized by falling AP and MP, and further by negative MP. Thus, the efficiency of both the fixed and variable factor is decreasing.