EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes

Q. No. 14: State and explain law of variable proportion. Also discuss its assumption. Answer: INTRODUCTION: Law of variable proportion expresses the behaviour of output as quantity of one factor is increased while the other factors are constant. It explains that with a given technology when units of variable factors of production are applied on fixed factors of production, marginal and average production increases in the beginning but when fixed factors are full utilized, units of variable factors gives less and less marginal and average production. DEFINITION: Law of variable proportion is defined as: As more and more units of a factor of production are added to fixed factors, total production rises, at first more in proportion to increase in variable factor, then less in proportion and finally decreases. According to BENHAM: As the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average product of that factor will diminish. SCHEDULE: Fixed F. O. P (Land) 10 acres Variable F.O.P (Labour) 1 2 3 4 5 6 7 Total Production 2 6 12 16 18 18 16 Marginal Production 2 4 6 4 2 0 -2 Average Production 2/1 = 2 6/2 = 3 12/3 = 4 16/4 = 4 18/5 = 3.6 18/6 = 3 16/7 = 2.3

EXPLANATION: The above schedule shows that fixed factor of production is land (10 Acres). Only variable factor (labour) can change the level of output. THREE STAGES OF PRODUCTION: These are as follows: STAGE I: This schedule shows that when 1st unit of labour is applied on fixed factor, MP is 2. When 2nd unit is employed, MP increases from 2 to 4. Similarly 3rd unit also increases MP to 6. In this stage total production is increasing at increasing rate. Here MP and AP both are increasing but MP is increasing faster than AP.
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EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes

STAGE II: In the second stage, when 4th unit of labour is employed, MP falls from 6 to 4. Similarly 5th unit of variable factor also gives less production as compared to 4th unit of labour. In this stage total production is increasing at decreasing rate. Here MP and AP both are falling but MP is falling faster than AP. STAGE III: In this stage when 6th unit of variable factor is applied on fixed factor of production, marginal production becomes zero. at this point total production is maximum. With the application of 7th unit of labour MP becomes negative and total production starts diminishing. DIAGRAM:
y-axis

18 16 14 12 10 8 MP AP TP 6 4 2 0 1 -2 2 3 4 5 6 7 MP AP x-axis I II III TP

Units of Variable Factors (Labour)

In the above diagram units of variable factors of production (Labour) is measured along x-axis while MP, AP and total production is taken on y-axis. In the first stage TP is increasing at increasing rate. This stage represents increasing return. In the 2nd stage MP and AP are falling but MP is falling faster than AP. This is the reason that TP is increasing at decreasing rate. It represents diminishing return. In the 3rd stage when 7th unit of Labour is applied on fixed factor MP becomes negative. Therefore TP is decreasing. This stage shows negative return. ASSUMPTIONS: The law of variable proportion is based on following assumption. 1: No Change in Fixed Factor of Production:
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EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes

The law of variable proportion holds only when fixed a factor of production does not exist. 2: Homogeneous Units: All units of variable factors of production are homogeneous. All workers are equal in physical health and mental capability. 3: Short Run Process: It is assumed that the process of production is short run, because in long run all inputs become variable. 4: No Change in Technical Knowledge: It is assumed that state of technical knowledge is given and remains unchanged. 5: Factors are perfectly Substitutes: It is further assumed that factors are substitutes of one another. It is possible to vary the proportions in which various inputs are combined.

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