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by
Balaji K
 !
 

î |aws of Variable Proportions
î Stages of Production function
î Returns to Scale and its Types
î Economies of Scale
î Types of Economies of Scale
î Factors/Causes of Internal and external economies
of scale
î Diseconomies of small scale and large scale
production

|aw of Variable Proposition

î It is also known as ³Law of Diminishing
Returns´
î Assumption:
A firm¶s production function consists of fixed
quantities of all inputs (land,equipment
etc)except labour which is a variable
input.When the firm expands output by
employing more and more labour,it alters the
proportion between fixed and the variable
inputs.
G
Definition of |aw of Variable
Proportions
î Œas more and more of some input,¶I¶ is
employed,all other| input quantities
0

being held constant,eventually a point

will be reached where additional
quantities of input µI¶ will yield
diminishing marginal contributions to
total product´- Baumol

 
Three stages of the |aw
½ixed Variable Total Average Marginal
½actor ½actor Product Product Product
A A A A
| 0
A


AA A

A 
  

A    

A  


A    A

A   

A  
 -A

Three stages of Prod . Fn in short

Stage A Increasing Returns to Scale

When average product (AP) is rising ,Marginal Product (MP)
rises more than AP

Stage
Constant Returns to Scale

When AP is Maximum and constant,MP becomes equal to
AP

Stage  Diminishing Returns to Scale

When AP starts falling,MP falls faster than AP

´
Contnd

Thus ,the total product,marginal product and

average product pass through three phases
viz,increasing,diminishing and negative return
stage.The law of variable proportion is nothing but
the combination of law of increasing and
diminishing returns.

†
uestion

î Why Increasing ,Diminishing and Negative Returns?

Why Increasing?
Fixed factor is abundant relative to the quantity of the
variable factor.It is also due to indivisibility of fixed factor

Why Diminishing ?
Any increase in variable factor beyond this point of
optimum will always result in Diminishing returns.

Why Negative?
Too much employment of variable factor,Greater costs and
lesser output A
Table A Increasing Returns to Scale
½actors Total Product Marginal
Labour Land Product or
(Units) (acres) Return in Units

A
 

 A 

  A 

 
 A

AA
Table
Constant Returns to Scale

½actors Total Product Marginal

Labour Land Product or
(Units) (acres) Return in Units
 A  A

 A
 A

Table  Decreasing Returns to Scale

½actors Total Product Marginal

Labour Land Product or
(Units) (acres) Return in Units

 A  

 A 


AG
Economies of Scale

Production may be carried on a small scale or

on a large scale by a firm.When a firm
expands its size of production by increasing
all the factors,it secures certain advantages
known as economies of Production.

A 
Types of Economies of Scale

Internal Economies
External Economies

A
Internal Economies of Scale

These are those which are opened to a single

factory or a single firm independently of the
action of other firms.They result from an
increase in the scale of output of a firm and
cannot be achieved unless output increases.
Hence,internal economies depend solely upon
the size of the firm and are different firms.

A

External Economies of Scale

The benefits of those which are shared in by a

number of industries when the scale of
production in an industry or group of
Industries increases.
Hence,external economies benefit all the
industries as the size of the industry increases.

A
Causes of Internal Economies of Scale

A.Indivisibilities

.Specilisation

A´
Types of Internal Economies of Scale

A.Technical Economies

.Managerial Economies
.Marketing Economies
.Financial Economies
.Risk Bearing Economies
.Economies of Research
.Economies of Welfare

A†
Types of External Economies of Scale

A.Economies of Concentration

.Economies of Information
.Economies of Welfare
.Economies of disintegration

Diseconomies of large Scale

Production
Financial,Marketing ,Managerial ,Technical

Diseconomies of risk taking and external

diseconomies

A
What are merits and demerits of Small
scale production
Compare and contrast from one industry to
other industry

Complements (-) vs Substitutes (+)

defined by sign of cross price elasticity