What is the Law of Variable Proportion?
The Law of Variable Proportion is an important concept in economics. It says that when you increase one factor of production while keeping others the same, the additional output from that factor will eventually decrease.
Also called the Law of Proportionality, it means that adding more of one factor can initially increase production, but after a certain point, the added value from that factor will start to drop.
To explain the Law of Variable Proportion, when you increase a variable factor, the total output first grows faster, then it grows slower, and eventually, production starts to decline. This shows that there’s a limit to how much one factor can improve production when other factors stay the same.
Assumptions of Law of Variable Proportion
The Law of Variable Proportion applies under certain conditions:
Constant Technology: It is assumed that technology remains the same. If technology improves, production will increase.
Variable Factors: The law assumes that some factors of production can change. It doesn’t apply if all factors are fixed.
Identical Factors: This assumes that all units produced are the same in quality, quantity, and price, meaning the factors are uniform.
Short Term: The law applies in the short term when it’s not possible to change all factors of production.
Law of Variable Proportion Example
An example of the Law of Variable Proportion can be seen on a farm.
Imagine a farmer who has a fixed amount of land and adds more workers to help with planting and harvesting. At first, adding more workers increases crop production because more tasks are being done. But after a certain point, adding too many workers makes the production increase slower because there’s only so much land to work with. Eventually, if too many workers are added, the production might even go down because the workers start getting in each other’s way.
This shows the different stages of the law: increasing production, slower production, and eventually a decrease in production.
Three Stages of Law of Variable Proportion
The Law of Variable Proportion has three key stages:
Increasing Returns: In this stage, total production grows faster as more of the variable factor is added. This happens because the fixed factors become more efficient with the addition of extra inputs.
Diminishing Returns: Here, total production still increases but at a slower rate. The marginal product and average product are still positive, but they begin to decrease as more units are added.
Negative Returns: In this final stage, total production starts to fall, and the marginal product becomes negative, showing that adding more of the variable factor harms production.
Importance of Law of Variable Proportion
The Law of Variable Proportion is important for several reasons:
Better Use of Resources: It helps businesses understand how to use their resources effectively. By knowing when adding more workers or materials stops improving production, businesses can avoid waste.
Planning Production: The law helps businesses decide how much of a certain resource, like labour, to add to get the most output without wasting anything.
Controlling Costs: Knowing this law helps businesses control costs. When adding more workers or resources doesn’t increase production, they can stop spending money on unnecessary things.
Maximizing Output: It helps businesses figure out the best amount of resources to use so they can get the most production without overusing them.
Better Decisions: It helps managers make smarter decisions about where to invest in labour, tools, or other resources, leading to less waste and more efficient work.
FAQs on The Law of Variable Proportion
1. What is the Law of Variable Proportions in economics?
The Law of Variable Proportions states that if you keep increasing the quantity of one input while keeping all other inputs fixed, the marginal product of the variable input will eventually decline. This economic principle, also known as the Law of Proportionality, explains the relationship between inputs and outputs in the short run, where some factors of production are fixed.
2. What are the three stages of the Law of Variable Proportions?
The law operates in three distinct stages that show how production is affected as a variable factor is increased:
- Stage 1: Increasing Returns to a Factor: Total Product (TP) increases at an increasing rate, and the Marginal Product (MP) of the variable factor rises. This is due to better utilisation of the fixed factor.
- Stage 2: Diminishing Returns to a Factor: TP continues to increase but at a diminishing rate. Both MP and Average Product (AP) fall, but remain positive. This stage ends when TP reaches its maximum and MP becomes zero.
- Stage 3: Negative Returns to a Factor: TP starts to decline, and MP becomes negative. Adding more of the variable input at this stage actually reduces the total output.
3. In which stage of production will a rational producer choose to operate and why?
A rational producer will always aim to operate in Stage 2: Diminishing Returns to a Factor. A producer will not operate in Stage 1 because the marginal product is still rising, implying that the fixed factors are underutilised. Operating in Stage 3 is irrational because the marginal product is negative, meaning each additional unit of input reduces the total output. Therefore, Stage 2 is the only economically feasible and profitable stage for production.
4. What are the key assumptions for the Law of Variable Proportions to hold true?
The law is based on a few key assumptions for it to be applicable:
- Constant Technology: The state of technology is assumed to be unchanged. Any technological advancement would increase output and disrupt the pattern.
- Short-Run Operation: The law applies only in the short run, where it is possible to change only the variable factors while fixed factors (like machinery or land) remain constant.
- Homogeneous Factor Units: All units of the variable factor (e.g., labour) are assumed to be equally efficient and identical.
- Factor Proportions are Variable: It must be possible to change the ratio of factors by adding more units of the variable factor to a fixed quantity of other factors.
5. How do Total Product (TP), Marginal Product (MP), and Average Product (AP) relate to each other in this law?
The relationship between TP, MP, and AP defines the three stages of the law. Total Product (TP) is the total output. Average Product (AP) is TP per unit of variable input. Marginal Product (MP) is the additional TP from one more unit of variable input. Their relationship is as follows:
- When MP > AP, the AP rises.
- When MP < AP, the AP falls.
- When MP = AP, the AP is at its maximum.
- TP is at its maximum when MP is zero.
6. What is the main difference between the Law of Variable Proportions and the Law of Diminishing Returns?
The Law of Diminishing Returns is a part of the Law of Variable Proportions. The Law of Variable Proportions is a broader concept that describes three phases of production: increasing, diminishing, and negative returns. In contrast, the Law of Diminishing Returns specifically refers to only the second stage, where the marginal product of a variable factor begins to fall as more units are added to a fixed factor.
7. Why is understanding the Law of Variable Proportions important for a business?
This law is crucial for business decision-making as it helps a firm find the optimal combination of inputs. By understanding the point of diminishing returns, a business can avoid over-investing in a single resource like labour or raw materials, control production costs, and determine the level of output that maximises efficiency and profitability in the short run.
8. How can the relationship between TP, MP, and AP be shown on a graph?
Graphically, the Total Product (TP) curve initially rises steeply, then less steeply, reaches a maximum, and then declines, forming an inverted 'S' shape. Below it, the Marginal Product (MP) and Average Product (AP) curves are drawn. Both are inverted 'U' shaped. The MP curve rises faster, peaks earlier, and then declines, eventually becoming negative. The MP curve intersects the AP curve at the maximum point of the AP curve, clearly showing the transition between stages.
9. Can a producer avoid the Law of Variable Proportions?
In the short run, the Law of Variable Proportions is unavoidable because, by definition, at least one factor of production is fixed. A producer cannot escape diminishing returns when continuously adding a variable input to a fixed one. However, in the long run, all factors of production become variable. In this scenario, the law does not apply, and instead, the concept of 'Returns to Scale' is used to analyse the relationship between inputs and output.
