Causes of Operation of Law of Variable Proportion/ Why does this law operate?

The various reasons for 3 phases of law of variable proportions are:

Reasons for Increasing Returns to a Factor (Phase 1):

There are three important reasons for the operation of increasing returns to a factor:

  1. Better Utilization of the Fixed Factor:

In the first phase, the supply of the fixed factor (say, land) is too large, whereas variable factors are too few.

So, the fixed factor is not fully utilised. When variable factors are increased and combined with fixed factor, then fixed factor is better utilised and output increases at an increasing rate.

  1. Increased Efficiency of Variable Factor:

When variable factors are increased and combined with the fixed factor, then former is utilised in a more efficient manner.

At the same time, there is greater cooperation and high degree of specialization between different units of the variable factor.

  1. Indivisibility of Fixed Factor:

Generally, the fixed factors which are combined with variable factors are indivisible. Such factors cannot be divided into smaller units.

Once an investment is made in an indivisible fixed factor, then addition of more and more units of variable factor, improves the utilisation of fixed factor. The increasing returns apply as long as optimum level of combination between variable and fixed factor is achieved.

Reasons for Diminishing Returns to a Factor (Phase 2):

The main reasons for occurrence of diminishing returns to a factor are:

  1. Optimum Combination of Factors:

Among the different combinations between variable and fixed factor, there is one optimum combination, at which total product (TP) is maximum. After making the optimum use of fixed factor, the marginal return of variable factor begins to diminish.

For example, if a machinery (fixed factor) is at its optimum use, when 4 labours are employed, then addition of one more labour will increase TP by very less amount and MP will start diminishing.

  1. Imperfect Substitutes:

Diminishing returns to a factor occurs because fixed and variable factors are imperfect substitutes of one another. There is a limit to the extent of which one factor of production can be substituted for another.

For example, labour can be substituted in place of capital or capital can be substituted in place of labour till a particular limit. But, beyond the optimum limit, they become imperfect substitutes of one another, which leads to diminishing returns.

Reasons for Negative Returns to a Factor (Phase 3):

The main reasons for occurrence of negative returns to a factor are:

  1. Limitation of Fixed Factor:

The negative returns to a factor apply because some factors of production are of fixed nature, which cannot be increased with increase in variable factor in the short run.

  1. Poor Coordination between Variable and Fixed Factor:

When variable factor becomes too excessive in relation to fixed factor, then they obstruct each other. It leads to poor coordination between variable and fixed factor. As a result, total output falls instead of rising and marginal product becomes negative.

  1. Decrease in Efficiency of Variable Factor:

With continuous increase in variable factor, the advantages of specialization and division of labour start diminishing. It results in inefficiencies of variable factor, which is another reason for the negative returns to eventually set in.

Importance of the Law of Variable Proportion:

The law of variable proportions has vast general applicability. Briefly:

  • It is helpful in understanding clearly the process of production. It explains the input output relations. We can find out by-how much the total product will increase as a result of an increase in the inputs.
  • It help the producer to work most ideal combination of input factors at reasonable prices.
  • It is useful for short run production planning at micro level.
  • The law tells us that the tendency of diminishing returns is found in all sectors of the economy which may be agriculture or industry.
  • The law tells us that any increase in the units of variable factor will lead to increase in the total product at a diminishing rate. The elasticity of the substitution of the variable factor for the fixed factor is not infinite.

From the law of variable proportions, it may not be understood that there is no hope for raising the standard of living of mankind.

The fact, however, is that we can suspend the operation of diminishing returns by continually improving the technique of production through the progress in science and technology

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By Hassham

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