In: Economics

# Suitable Example of Law of Variable Proportions in Economics.

What do you understand by Law of Variable Proportions in Economics? Explain with suitable example.

## Solutions

##### Expert Solution

Suppose, we have a 10 acre land and the capital investment of $20,000 which is fixed. Then we increase the number of labour one by one and see the increase in physical product which is shown in the following table - 1.1. Table - 1.1. (Law of Variable Proportions)  Number of Labour Total Physical Product (TPP) Marginal Physical Product (MPP) Average Physical Product (APP) 0 0 - - 1 40 40 (IR) 40.0 2 90 50 (IR) 45.0 3 150 60 (CR) 50.0 4 210 60 (CR) 52.5 5 260 50 (DR) 52.0 6 300 40 (DR) 50.0 7 330 30 (DR) 47.1 8 350 20 (DR) 43.8 9 360 10 (DR) 40.0 10 360 0 (DR) 36.0  IR = Increasing Returns CR = Constant Returns DR = Diminishing Returns. Output is shown in Quintals. When we look at this table we find that land and capital has been kept fixed while labour has been made the variable factor. When we increase the labour one by one, then total physical product increases at an increasing rate up-to the third labour, then for the fourth labour it increases at a constant rate and after the fourth labour it increase at a diminishing rate. The rate of increase of the TPP is indicated by Marginal Physical Product (MPP). That is why upto third labour MPP is increasing (40,50,60), for the fourth labour MPP is constant (60) and from fifth labour onwards the MPP is continuously diminishing (50,40,30....). At the tenth labour MPP is zero. It means that even if we increase the labour, there is no increase in output. If we continue to increase the number of labour even after this, the total output may even decline i.e. MPP will become negative. In this way we can say that upto third labour we get increasing returns, for the fourth labour we get constant returns and thereafter, we get diminishing returns. However, it must be kept in mind that increasing and constant returns are just possibilities, while diminishing returns is a certainty. It means that it is possible that we may not get increasing or constant returns and after the first labour we start getting diminishing returns. Because of the certainty of diminishing returns, this law is called the ‘Law of Diminishing Returns'. Diminishing Returns is an inevitable fact it may be postponed for some time but it can not be eliminated, the only uncertainty about it is the point when they start applying. They may be applicable after the first unit or after tenth unit also, but eventually they have to apply. There is no escape. Ordinarily, the basis of deciding the application of diminishing returns is Marginal Physical Product (MPP), but some economists are of the view that we should decide diminishing returns on the basis of Average Physical Product (APP) and not MPP. From this view-point, in the above table, diminishing returns start applying from fifth labor, because upto this point APP is increasing and from fifth labour the APP starts diminishing. The main reason for the application of this law is that factors of production are not perfect substitutes to each other and, therefore, the deficiency of some factors can not be fully compensated by increasing the quantity of any one factor. Had the factors been perfect substitutes, the application of diminishing returns could have been continuously postponed, but that is not so. There is always an ideal combination of factors. As long as we do not reach that ideal combination, increasing returns are available and after that the diminishing returns. In this way, we can say that had the quantity of land and capital been higher, the diminishing returns would have applied not from the fifth labour but from some higher number. Suppose, we have a 10 acre land and the capital investment of$20,000 which is fixed. Then we increase the number of labour one by one and see the increase in physical product which is shown in the following table - 1.1.

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