Law of Variable proportions

The law of Variable Proportions is also known as the Law of Diminishing Returns,
Principle of Diminishing Marginal Productivity, or simply Diminishing Returns.
It can be defined as,
1. A concept in economics that if one factor of production (eg. The number of
Workers) is increased while other factors (eg. Machines and Workspace)
are held constant,

the output per unit of

the variable factor

will

eventually

diminish.
2. A law of economics stating that, as the number of new employees increases, the
marginal product of an additional employee will at some point be less than the
marginal product of the previous employee.
In simple language, it is said that The pain is not worth the gain.
The 19th century classical economists like Tugot, Ricardo, West and Malthus visualized
the operation of this law in agriculture. Alfred Marshall, a neo-classical economist too
considered the law of diminishing returns in relation to agriculture only however, he
said that in agriculture, man is only a facilitator and nature is the controller. He thought
that in industry increasing returns would prevail.
The law of Variable Proportions employs the principle of Ceteris Paribus which
means all other things remaining constant.
It deals with the change in one factor of production and the effect it has on the total
output, as it works with the other factors of production. This is also because in the short
run, only the variable factors of production can be changed. A firm also has to decide
on how it will allocate its spending in order to get the greatest possible output from the
given outlay. For example, the same amount of concrete can be obtained by employing
many men with one shovel each or emploing one man with a concrete mixer.

The present day formulation of the law is, Provided that all units of the variable factor
are perfect substitutes of each other and that techniques or organization do not change,
if one factor is held fixed but additional units of the varying factor are added to it,
eventually the extra output resulting from an additional unit of the variable output will
become successively smaller. Since the additional output resulting from an extra unit of
the variying factor is known as the marginal product, the law refers to the eventual
diminishing marginal productivity.
Assumptions of the Law:
1.

Constant State of Technology

The state of technology is assumed to be given and unchanged. If there is
improvement in the technology, then the marginal product may rise instead of
diminishing.

2.

Fixed Amount of Other Factors

There must be some inputs whose quantity is kept fixed. It is only in this way that
we can alter the factor proportions and know its effects on output. The law does not
apply if all factors are proportionately varied.

3.

Possibility of Varying the Factor proportions

The law is based upon the possibility of varying the proportions in which the
various factors can be combined to produce a product. The law does not apply if the
factors must be used in fixed proportions to yield a product.

4.

All Units of The Variable Factor are Equally Efficient

The law is based on the assumption that all units of the variable factor are equally
efficinet, as if this condition is not fulfilled, and the efficiency of variable the factors
(Labour) differes, the output will be not be proportionate. That is, the units of
variable factor are homogenous.

5.

The Law Opreates In The Short Run:

The law is based on the assumption that the given changes and results are occuring
in the Short Run, i.e a short period of time.

The law will now be illustrated with the help of the following table and diagrams.

Table
Variations in output of Potatoes Resulting from a change in labour employed.
No. of men

Total Product

Marginal

Average

employed on a

(TP)

Product (MP)

Product (AP)

fixed unit of land

1
2
3
4
5
6
7
8
9
10

100
220
360
460
530
570
595
600
594
560

100
120
140
100
70
40
25
5
-6
-34

100
110
120
115
106
95
85
75
66
56

Stage

I
I
I
II
II
II
II
II
III
III

Concepts Involved In Law Of Variable Proportions.

i.

Total Product (TP)

Total Product is the amount of total output generated from a land with a given number
of labourers employed at a given time.

ii.

Average Product (AP)

Average product is the total product (TP) divided by the number of labourers employed.
AP = TP / No. of Labourers. Average Product gives us the average efficiency of a
labourer.

iii.

Marginal Product (MP)

Marginal Product is the change in total product due to a change in the variable factor of
production (labour).
MPL = TP/L
Where: = Change
L = Labour
In the example in the table

There are increasing returns to labor for the first three units of labor employed.
The law of diminishing returns sets in with addition of the fourth worker.
Both the average and the marginal products increase at first and then decline.
The marginal product declines faster than the average product.
When 8 men are employed, total product is at a maximum.
The marginal product of the 9th laborer is negative.

Thus,
1.

If MP > 0, TP will be increasing as L increases

2.

If MP = 0, TP will be constant as L increases

3.

IF MP < 0, TP will be falling as L increases.

Total Product
Stage I (Increases at an
increasing rate)
Stage I (Increases at a
diminishing rate)
Stage II (Continues to
increase at a diminishing
rate)
Stage II (Reaches
maximum)
Stage III (Diminishes)

Marginal Product

Average Product

Increases

Increases

Reaches a maximum and

begins to diminish

Continues to increase

Continues to diminish

Reches maximum and begins

to diminish

Becomes zero

Continues to diminish

Becomes negative

Continues to diminish but must

always be greater than zero

Explanation of diagram:
X Axis measures the variable input that is labour.
Y Axis measures the Average Product, Marginal Product and Total Product.
The total product has increased up to the point B. In other words the total product curve
reaches a maximum when MP = 0 and then starts declining when MP < 0.
Characteristics Exhibted by the Total Product Curve:
1.

MP > 0 and increasing (from 0 to A)

2.

MP > 0 but decreasing (from A to B)

3.

MP = 0 at the point B

4.

MP < 0 after the point B

Three stage of production in the short-run

Production in the short-run can be divided into three stages:
Stage I from the origin to N1
Stage II from N1 to N2
Stage III to the right of N1

These three stages are illustrated in figure 1. No profit maximizing production would
take place in stage I or III.
In stage I, the proportion of variable factor to fixed factor is low. Therefore, by adding
one more unit of labor, the producer can increase the average productivity for all the
units. A land with 100 feilds and only two Labourers would be operating in a stage I of
the short-run production function. By increasing the amount of labor in stage I and the
average product of labor increases. As for stage III, it does not pay the producer to be in
this region because by reducing the labor input he can increase total output and save in
the cost of a unit of labor. In this stage, there is too much of the variable factor relation
to the fixed factor. A land with too many labourers in relation to the number of feilds is
an example of stage III. Therefore, stage III is considered as an irrational phase of
production. Nevertheless, it is quite likely that a firm lacking perfect knowledge may be
operating in this stage. In agriculture, this may be found to be very common.
Stage II is the only stage in which there is neither a redundancy of the variable factor
nor a redundancy of the fixed factor. Throughout this range the average product of
labor declines, but he marginal product is positive. Thus, the economically meaningful
range is the II stage.