There are three phases or stages of production, as determined by the law of variable proportions
(i) Increasing returns.
(ii) Diminishing returns.
(iii) Negative returns.
Diagram/Graph:
These stages can be explained with the help of graph below
(i) Stage of Increasing Returns (Stage I).
- Occurs when marginal physical product (MPP) > average physical product (APP). APP is increasing throughout this stage, indicating that the average rate at which X is transformed into Y, increases until APP reaches its maximum at the end of Stage-I.
The first stage of the law of variable proportions is generally called the stage of increasing returns. In this stage as a variable resource (labour) is added to fixed inputs of other resources, the total product increases up to a point at an increasing rate .
The total product from the origin to the point F on the slope of the total product (TP) curve increases at an increasing rate. From point F onward, during the stage II, the total product no doubt goes on rising but its slope is declining. This means that from point F onward, the total product increases at a diminishing rate. In the first stage, marginal product curve of a variable factor rises in a part and then falls. The average product curve rises throughout and remains below the MP curve.
Causes of Initial Increasing Returns:
The phase of increasing returns starts when the quantity of a fixed factor is abundant relative to the quantity of the variable factor. As more and more units of the variable factor are added to the constant quantity of the fixed factor, it is more intensively and effectively used. This causes the production to increase at a rapid rate. Another reason of increasing returns is that the fixed factor initially taken is indivisible. As more units of the variable factor are employed to work on it, output increases greatly due to full and effective utilization of the variable factor.
(ii) Stage of Diminishing Returns (Stage II)
-Occurs when MPP is decreasing and is less than APP but greater than zero. The physical efficiency of the variable input reaches a peak at the beginning of Stage–II. On the other hand physical efficiency of fixed input is greatest at the end of Stage-II. This is because the number of fixed input is constant and therefore the output/ unit of fixed input must be the largest when the total output from the production process is maximum.
This is the most important stage in the production function. In stage 2, the total production continues to increase at a diminishing rate until it reaches its maximum point (H) where the 2nd stage ends. In this stage both the marginal product (MP) and average product of the variable factor are diminishing but are positive.
Causes of Diminishing Returns:
The 2nd phase of the law occurs when the fixed factor becomes inadequate relative to the quantity of the variable factor. As more and more units of a variable factor are employed, the marginal and average product decline. Another reason of diminishing returns in the production function is that the fixed indivisible factor is being worked too hard. It is being used in non-optima! Proportion with the variable factor, Mrs. J. Robinson still goes deeper and says that the diminishing returns occur because the factors of production are imperfect substitutes of one another.
(iii) Stage of Negative Returns (stage III)
- Occurs when MPP is negative. Stage III occurs when excessive quantities of variable input are combined with the fixed input, so much, that total physical product (TPP) begins to decrease.
In the 3rd stage, the total production declines. The TP, curve slopes downward (From point H onward). The MP curve falls to zero at point M and then is negative. It goes below the X axis with the increase in the use of variable factor (labour).
Causes of Negative Returns:
The 3rd phase of the law starts when the number of a variable, factor becomes, too excessive relative, to the fixed factors. A producer cannot operate in this stage because total production declines with the employment of additional labour.
A rational producer will always seek to produce in stage 2 where MP and AP of the variable factor are diminishing. At which particular point, the producer will decide to produce depending upon the price of the factor he has to pay. The producer will employ the variable factor (say labour) up to the point where the marginal product of the labour equals the given wage rate in the labour market
marto answered the question on
April 16, 2019 at 12:52