law of variable proportion - courseware
TRANSCRIPT
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LAW OF VARIABLE PROPORTION
Dr Bibhunandini Das
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WHAT IS THE LAW?
• The nature of rate of change in output due to change in variable factors
• Change in only one variable factor
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STATEMENT OF LAW
• As we increase quantity of only one input keeping other inputs fixed, total product
initially increases at an increasing rate, then at a diminishing rate and finally at a
negative rate
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ASSUMPTIONS
• The state of technology is assumed to be given and unchanged
• There must be some inputs whose quantity is kept fixed
• The law applies to the field of production only
• All variable factors are equally efficient
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EXAMPLE
• A farmer has 1 acre of land (fixed factor) on which he wants to increase the
production of wheat with the help of labour (variable factor)
• When he employed more and more units of labour, initially output increased at an
increasing rate, then at a decreasing rate and finally at a negative rate
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EXAMPLE
Fixed factor
(land)
Variable factor
(labour)
TP MP AP Phase
1 1 10 10 10 1st (Increasing
Returns)1 2 30 20 15
1 3 45 15 15 2nd
(Diminishing
Returns)1 4 52 7 13
1 5 52 0 10.4 3rd (Negative
Returns)1 6 48 -4 8
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DIAGRAM
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THREE PHASES
• Phase I – TP increases at an increasing rate and MP also increases
• Phase II – TP increases at decreasing rate and MP falls
• Phase III – TP starts decreasing and MP not only falls, but also becomes negative
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REASONS OF PHASE I
• Better utilisation of the fixed factor
• Increasing Efficiency of variable factors
• Indivisibility of fixed factor
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REASONS OF PHASE II
• Optimum combination of factors
• Imperfect substitutes
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REASONS OF PHASE III
• Limitation of fixed factor
• Poor coordination between variable and fixed factor
• Decrease in efficiency of variable factor