Question

Why is it that, in the short-run, after a certain number of workers has been hired, output increases by less and less with each additional worker hired? Illustrate your answer with an example. Would there be any circumstances under which this phenomenon would not occur?

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Answer 1

Law of Variable Proportions state that:

" An increase in some inputs relative to other fixed inputs will in a given state of technology, cause the input to increase, but after a point the extra output resulting from the same additions of extra inputs will become less and less"

The Law of Variable proportions is valid only for the short run and involves the major assumption that the state of technology along with inputs such as capital is held to be constant with only the proportion of one of the input left free to vary.

The production process will thus involve combination of inputs, one of which will vary and one of which will remain constant. The constancy of the fixed input and the variablility of the other input form the crux of the law. What happens in the production process is that, initially the producer cannot produce only with the capital and machineries which are held to be constant in the short run. In order to initialise the production process, the producer needs to hire some workers (variable input) . Since the capital which remained untilised till now, with the addition of the labourers will come to use. The capacity utilsation of machinery and capital which are considered as the fixed input, as it gets better utilised, will give a boost to the production process, with the output increasing at an increasing rate.

Now as the producer will hire more and more number of labours, the fixed input will be better utilised. The output will thus keep on increasing at an increasing rate till it reaches point of inflexion. The point of inflexion is the point where the rate of increase in the level of output changes. What happens is, even though there occurs better utilisation of the fixed input with the increase in the variable input, but after a certain level of production, the fixed input will near its full capacity utilisation level due to it being constant and fixed, while the variable factor will continue to increase. As the fixed factor becomes more and more scarce due to the addition of variable inputs, the marginal product of labour or variable input will start diminishing. When the production reaches point of inflexion, there will be increase in output with increase in the amount of variable input, but the output will tend to increase at a diminshing rate. This increase in output at a diminishing rate will continue until the addition of one more unit of variable input does not bring any increase in the level of output and after this point of production, any addition to the variable input will decrease the level of output.

In terms of variable proportion we see that, in the 1st phase of production, the proportion of fixed factor > proportion of variable factor. As the amount of variable factor is increased, fixed factor becomes lesser and lesser available for the additional variable factor. Due to the realtively lesser availability of the fixed factor for the additional variable factor, the marginal product of variable factor declines and after certain level of production, the proportion of variable factor> the proportion of fixed factor, which results in negative marginal returns.

Example : Suppose in a chocolate factory the producer has bought a chocolate machine. The chocolate factory or the machine cannot produce chocolates on itself. So the producer hires a labour. Given the chocolate machine a labour will utilise the machine and starts poducing some units. But the machine can be better utilised by employing more labours. As the producer will employ more labours, the same machine can now produce more units of output, as there will be better subdividion of work between labourer, better utilisation of machine and specialisation of workers in doing a particular work, the rate of increase in the amount of chocolates produced will increase at an increasing rate. But now as more and more labourers are hired, the same machine will now be used by larger number of labourers to work. This will reduce the ouput per additional labourer. Even now when more labourers are hired, there will be rift between the labourers, there will arise competition for the usage of machine as a reult of which hiring more labourers will give negative marginal returns.

In case of variable proportions, since we take one input as constant, and one input variable, the variable proportions brings changes in the marginal returns of output. One assumption which has been taken in this is that, the fixed factor is indivisible. Just like a machine cannot be divided into parts with repsect to the variable inputs to work, the indivisibility of the fixed factor in general holds. However if the fixed factor was divisible, the same could be divided with each additional to the variable factor to work on. If this would have happened, then the diminishing returns would not hold as each variable factor would then utilise the fixed factor as per his own proportion.