Notesale: Turn your study into money

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# important terms
Total product- It is total amount of goods and services produce by firm in as specified year of
time
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Average product- is per unit output of a variable factor is average product
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Marginal product- When quantity of total good produce is change by employing more or less
labor is called marginal product
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Now, if
firm add 1 more labor then total unit is 90, average is 45 and marginal is 40
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# Law of variable proportions or laws of returns- this law is related to short period
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Increase in unit at increasing rates
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Increase in unit at constant rate
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Increase in unit at decreasing rate

From the above chart it is clear that adding additional labor up to3 gives increasing return, from
labor 4 to5 gives constant return but adding labor beyond 5 gives diminishing return that is loss
to firm
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Technology- this law will not be applied in case of advancement of technology because
than marginal and average product will rise
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Fixed input- if all the factor are variable than law will not apply because than it result in
increase in production
3
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Now we will be discuss all the 3 stages of this law in detail
MP= marginal product, tp = total product and AP = average product, please use the word
variable factor instead of labor, I am using labor word so that you gets the concept clear
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And the situation is called law of increasing return
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The chart shows that 1 labor gives tp of 20 and MP of 20
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Factor for law of increasing return
1
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We cannot divide the 1 single human
people in 2 parts
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2
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3
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So it is advised
that producer should make effort to keep on increasing the production by adding
additional labor so that fixed cost can be reduced
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Division of labor- It is recommended that work should be fairly divide to expert of
the field so that more output is obtained at decreasing cost
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Economies- internal and external economies of large scale result in law of
increasing return
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Point of optimum- Law of increasing can only be applied till the point of optimum
utilization of factor of production is not achieved, after this there will be constant and
declining return will be seen
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Here production increases at same rate as increase in labor
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In the above chart with the increase in labor MP and AP will not increase instead it remain
constant
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Law of diminishing return- when an MP and AP decrease with increase in labor to
production process the law of diminishing return is said to be operates
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This law applies because
There are certain factors which forever remain fixed and cannot be increase with
increase in labor like land, capital
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Firm use substitute factor for scare resources but they are not always available and
reliable
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As the above chart show that MP keeps on declining even after adding more labor to
production because firm has already reached the optimum utilization of resources
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# Return to scale
Law of return to scale- the relationship between total number of output and total production in
a long run, when variable factor and inputs are increased in same ratio is called return to scale
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It can leads to 3 forms
In simple words the profit earned by firm may be either at increasing, constant or at decreasing
rate is called return to scale
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Increasing return to scale- the firm tries to increase it profit by adding additional;
doses of factor of production that is scale of production is increased
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Here 500 unit is extra that additional

2
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Example if
1 labor gives output of 1000 and firm add 1 more labor that is total 2 labor and output
is 2000 that is 1000 unit of each labor the return is said to be constant
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Decreasing return- Adding additional factor of production and obtaining out at rate
less that the additional factor of production is case of decreasing return
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, because additional labor contribute only
800 instead of 1000
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The above mentioned all the forms of return to scale are shown in chart
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Changes in only variable
factor
Ratio between variable and
fixed factor changed
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Changes in all factor
Ratio between fixed and
variable factor do not change
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Short notes
Economies to scale
Internal economies- Profit earned by the producer due to they individual effort is called internal
economies
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Here, it is important to note that all the efforts are done only by owner not by
government or outside party like financial institutes
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If profit increases due to adequate arrangement of
transport, communication and subsidiary by government, publicity done by consumers due to
mouth of words, in the entire cases owner does not make any effort and earn profit

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