Question

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Reflect on the two (02) following topics:

1) The Law of Increasing Returns to a factor of production.

2) The Law of Diminishing Returns to a factor of production.

Be explicit and analytical. Also, provide appropriate examples to support your analysis.

ANS

1) The Law of Increasing Returns to a factor of production.

Be explicit and analytical. Also, provide appropriate examples to support your analysis.
The law of increasing returns is also called the law of diminishing costs. The law of increasing return states that: When more and more units of a variable factor is employed, while other factor remain fixed, there is an increase of production at a higher rate. The tendency of the marginal return to rise per unit of variable factors employed in fixed amounts of other factors by a firm is called the law of increasing return. An increase of variable factor, holding constant the quantity of other factors, leads generally to improved organization. The output increases at a rate higher than the rate of increase in the employment of variable factor.

The increase in output faster than inputs continues so long as there is not deficiency of an essential factor in the process of production. As soon as there occurs shortage or a wrong or defective combination in productive process, the marginal product begins to decline. The law of diminishing return begins to operate. We can say that there are no separate laws applicable to agriculture and to industries. It is only the law of variable proportions which applies to all of the different industries. However, the duration of stages in each productive undertaking will vary. They will depend upon the availability of resources, their combination in right proportions, etc. There are certain manufacturing industries where the factors of production can be combined and substituted up to a certain limit, it is the law of increasing returns which operates. In the words of Prof. Chapman: "The expansion of an industry in which there is no dearth of necessary agents of production tends to be accompanied, other things being equal, by increasing returns".

The increasing returns mainly arises from the fact that large scale production is able to secure certain economies of production, both internal and external. When an industry is expanded, it reaps advantages of division of labor, specialized machinery, commercial advantages, buying and selling wholesale, economies in overhead expenses, utilization of by products, use of extensive publicity and advertisement, availability of cheap credit, etc. The law of increasing returns also operates so long as a factor consists of large indivisible units and the plant is producing below its capacity. In that case, every additional investment will result in the increase of marginal productivity and so in lowering the cost of production of the commodity produced. The increase in the marginal productivity continues till the plant begins to produce to its full capacity.

2) The Law of Diminishing Returns to a factor of production.

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations. The law of diminishing returns is related to the concept of diminishing marginal utility and can be contrasted with economies of scale.

This law assumes that technology is fixed and thus the techniques of production do not change. It states that as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline. For example, if additional workers are hired to work with a constant amount of capital equipment, output will eventually rise by smaller and smaller amounts as more workers are hired.

Answer 1

(Modern) This law states that units * Returns to faclar : Law 9 Variable Proportion when more and more of a variable factor care combined with fired factor, TP / Output) increases infeasing sale, then, increases at demnishing hati & finally starts folling Assumplioni (same as of returens to factor) is to mogeneous unit of Variable factos ) Rationeel produces CS Scanned with CamScanner

3) Technology is constant 4) short run 57 some factors are fixed while some are Variable 6) Bruce of factors of production does change Schedule чр not Lechour ТР uniting AP. - 2 2.5. 5 3 sslage 3 3 3 3 24 4 5 6 7 8 14 15 2.5 T7 - 1 stage قلهم en Fast sraste 100) TPS bicreating at at excreasing upto point. &, & then start increasing at Secreasing Rate • MP is increases reaches at its maximum AP is reaches maximum where MP=AP. ( stage encls here) & starts falling increasing CS Scanned with CamScanner

Tefalling JIP Land T IL ILL Labous y MP Max INP-AP Land Aprever becomes zero. ove SMP Labour second stage (QA): . Total therainy at dimnishuy hate de reachde • Ap is falling &e is the & aboves, MP. curve MP w falling & stage ends where MP=0 Carren TP maximum) Third stage Cafter O) • TP starts declining CS Scanned with CamScanner

AP & still MP become falling regative (so stage of -ve Returns CS Scanned with CamScanner

PP is using MP istising at a sing maxm Stage PP MP I (0-0) Asing returns become rate to factor up to E (0-01) TP asing at Mp falls & sing retwind & sing rate to become to factor & reaches zero tomaam in Cafter O) TP falls/ MP is stage of Eve returns negative CS Scanned with CamScanner

1st stage is increasing returns to factor

2nd stage is diminishing returns to factor

3rd stage is negative returns