The laws of production

The laws of production

Production function shows the relationship between a given quantity of input and its maximum

possible out put.	Given the production function,		the relationship	between additional quantities of
input and the additional		output can be easily obtained. This kind of			relationship yields  the law of
production The  traditional theory of  production  studies  the marginal					input-output relationship under
(I) Short run; and (II) long run. In the short run, input-output relations					are studied with one variable
input,  while other inputs		are  held  constant .The	Law of  production		under these	assumptions  are
called “ the Laws of variable production”.  In the long run input output				relations  are		studied assuming
all  the input  to	be  variable. The long-run input output relations are studied under `Laws of Returns to
Scale.

Law of Diminishing Returns (Law of Variable Proportions)

The Laws of returns states the relationship between the variable input and the output in the short term. By definition certain factors of production (e.g.-Land, plant, machinery etc) are available in short supply during the short run . Such factors which are available in unlimited supply even during the

short periods

are

known as  variable factor.  In short-run  there fore ,the  firms can employ a  limited or

fixed quantity

of

fixed  factors  and an unlimited

quantity

of

the variable  factor . In other  words,

firms  can employ  in  the  short  run  varying

quantities of

variable inputs against given quantity of

fixed

factors. This kind of change in input combination leads to variation in factor proportions.

The

Law which brings out  the  relationship between varying factor

properties and

output

are there fore

known as the Law of variable proportions..

The variation in inputs lead to a disproportionate increase in output more and more units of

variable  factor  when

applied  cause an  increase in

output but  after a point the extra output will

grow

less

and less. The

law which brings out

this

tendency in

production is

known

as‟ Law of

Diminishing Returns`

The Law of Diminishing returns levels that any attempt to increase output by increasing only

one

factor  finally faces

diminishing returns.

The Law states that when some factor remain constant

,more and more units

of a

variable  factor are

introduced the production  may increase

initially

at an

increasing  rate; but after a point it increases only  at diminishing

rate. Land  and capital remain fixed in

the short-term whereas labour shows a variable nature.

The following table explains the operation of the Law of Diminishing Returns.

No. of	Total	Average	Marginal
Workers	product	product	Product
1	10	10	10
2	22	11	12
3	36	12	14
4	52	13	16
5	66	13.2	14
6	76	12.7	10
7	82	11.7	6
8	85	10.5	3
9	85	905	0
10	83	8.3	(-2)

The above table illustrates several important features of a typical production function .With one

variable  input.- here both  Average		Product	(AP) and Marginal Product (MP)			first	rise ,reach  a
maximum - then	decline. Average product is		the	product for one unit	of labour . It is arrived at
by dividing the	Total Product (TP)	by number		of workers Marginal	product is	the	additional

product resulting term additional labour.  It is found out by dividing the change in total product by the

change in the number of workers. The total output increases at an increasing rate till the employment

of the 4^th worker. The rate of increase in the marginal product reveals this .Any additional labour

employed beyond  the 4^th  labour clearly faces the operation of the Law of  Diminishing Returns. The

maximum marginal product is 16 after which it continues to fall , ultimately becoming negative. Thus

when more and more units of labour are combined with other fixed factors the total output  increase

first at an increasing rate then at a diminishing rate finally it becomes negative.

The graphical representation the above table is shown below

.

OX  axis

represents  the  units  of  labour

and

OY

axis

represents

the  unit  of  output . The  total

output(TP)curve has a

steep  rise  till  the

employment

Of

the

₄th

worker. This

shows that the

output increases at an increasing rate till the

employment of the 4^th

labour . TP curve still goes on

increasing but only at a diminishing rate. Finally TP curve shows a downward trend.

The Law of Diminishing

Returns operation at three stages .At the first stage, total product

increases

at

an

increasing  rate .The marginal

product at

this stage

increases at an

increasing

Rate

resulting

in  a  greater  increases  in  total  product .The average

product  also

increases.  This

Stage

continues up

to

the point where average  product is

equal to

marginal

product .the law  of increasing

returns is in operation at this stage

The

Law of increasing Returns operates from the second

stage

on wards .At the second

stage , the

total

product  continues to

increase

but

at

a

diminishing

rate .

As the marginal product

at this stage starts falling ,the average product also

declines . The

second

stage comes to  an end

where

total

product

become

maximum

and

marginal

product

becomes

zero.

The marginal

product

becomes negative in  the

third  stage. So the total product also declines. The average product

continues to decline in the third stage.

Assumptions of Law Diminishing Returns

The Law of Diminishing Returns is based on the following assumptions;-Returns is based on the following assumptions;-

1.      The production technology remains unchanged

2.      The variable factor is homogeneous.

3.      Any one factor is constant

4.      The fixed factor remains constant.

Law of Returns to scale

In the long –run all the factor of production are variable ,and an increase in output is possible by increasing all the inputs. The Law of Returns to scale explains the technological relationship

between  changing scale  of		input and  output. The law  of  returns of scale explain how a simultaneous
and proportionate  Increase in  all  the			inputs	affect  the	total  output. The increase in output  may be
proportionate ,	more than	proportionate or		less  than	proportionate.  If	the	increase  in  output  is
proportionate	to the  increase in input ,		it is	constant Returns to scale .If It		is	less then proportionate
it is diminishing returns  to		scale . The	increasing returns to the scale comes				first ,then constant and
finally diminishing returns to scale happens.

Increasing Returns to scale

When proportionate increase in all factor of production results in a more than proportionate increase in output and this results first stage of production which is known as increasing returns to scale. Marginal output increases at this stage. Higher degree of specialization, falling cost etc will lead higher efficiency which result increased returns in the very first stage of production.

Constant Returns to scale

Firms cannot maintain increasing returns to scale indefinitely after the first stage , firm enters a stage when total output tends to increase at a rate which is equal to the rate of increase in inputs. This stage comes in to operation when the economies of large scale production are neutralized by the diseconomies of large scale operation.

Diminishing Returns to Scale

In this stage ,a proportionate increase in all the input result only less than proportionate increase in output . This is because of the diseconomies of large scale production. When the firm grows further, the problem of management arise which result inefficiency and it will affect the position of output.

Economies of Scale
The  factors	which cause the				operation of the laws				of  returns the scale are grouped under economies
and diseconomies  of scale . Increasing							returns to		scale operates because of economies  of scale and
decreasing	returns		to	scale	operates		because of  diseconomies  of			scale   where  economies  and
diseconomies  arise			simultaneously.  Increasing					returns to  scale  operates  when economies  of scale
are  greater	then	the		diseconomies		of	scale	and	returns to   scale	decreases when  diseconomies
.overweight	the	economies			of  scale	. Similarly  when  economies and				diseconomies are  in  balance
,returns to scale becomes constant.
	When a firm increases					all the factor of production it enjoys the same advantages of
economies of production . The economies of scale are classified as ;

 1.  Internal economies.

2.  .External economies

Internal economies of scale

Internal economies are those which arise form the explanation of the plant-size of the firm .Internal economies of scale may be classified;-

(a)    Economies in production.

(b)     Economies in marketing

(c)    Economies in economies

(d)   Economies in transport and storage

A . Economies in production :-it arises term

1.      Technological advantages

2.      Advantages of division of labour and specialization

B . Economies in marketing;-It facilitates through

1.      Large scale purchase of inputs.

2.      Advertisement economies ;

3.      Economies in large scale distribution

4.      Other large-scale economies

C . Managerial economies ;- It achieves through

1.      Specialization in management

2.      Mechanization of managerial function.

D . Economies in transport and storage

Economies in transportation and storage costs arise form fuller utilization of transport and storage facilities.

External Economies of scale

External  or pecuniary economies to large size firms arise from the discounts available  to it due

to;
1	. Large scale purchase of raw materials
2	. Large scale acquisition of external finance at low interest
3	. Lower advertising rate fun advertising media.
4	. Concessional transport charge on bulk transport.
5.	Lower  wage  rates  if  a  large  scale   firm  is  monopolistic  employer	of  certain  kind  of
	specialized labour

Thus External economies of scale are strictly based on experience of large –scale firms or well managed small scale firms. Economies of scale will not continue for ever. Expansion in the size of the firms beyond a particular limit , too much specialization, inefficient supervision, Improper labour relations etc will lead to diseconomies of scale .