Laws of Production

The law of diminishing returns or the law of variable proportion indicates that with the addition of more units of a variable input such as raw materials and workers to fixed amounts of land and capital, total production will climb at first, then decline and this is a short-run tactic. When the marginal output of labour starts to fall, diminishing returns to labour ensue. This indicates that overall output will continue to increase, even though slower as more people are hired. All components of production are changeable in the long run. Returns to scale represent how a corporation’s outcome responds to element input changes.

 Production theory is primarily characterised by two matters:

1) Production Function

 2) Law of Production

 Production Function

 The production function is the relationship between a firm’s physical production (outcome) and the material components of production. The functional connection between the quantity of sound produced (outcome) and the components of production required to generate it is referred to as the production function. 

 Law of variable proportion

Assumptions: The law of variable proportions is valid if and only if the following requirements are met:

Constant Condition of Technology:

For starters, the status of technology is believed to be predetermined and rigid. If technology improves, the marginal product will increase rather than decrease.

Different Aspects in a Fixed Amount:

Second, there should be inputs with a set amount. In this method change the factor magnitudes and see how they affect output can be obtained. If all parameters are constantly varied, the law does not apply.

Potential of Altering the Factor proportions:

Third, the law is founded on the potential of modifying the amounts in which the countless ingredients might be mixed to create a product. If the elements must be combined in a particular order to produce a product, the law does not apply.

 MP: Marginal product

TP: total product

Ap average product

3 stages of Law of variable Proportion

First stage: Increasing Returns Stage

Total product rises at a growing pace in this stage and fixed factors’ efficiency improves when further units of the variable aspects are added to them. The slant of the total product curve T.P is growing from the beginning to the point F in the figure, i.e. the curve T.P is concave up to the point [.F], implying that marginal product M.P of labour grows. The point of inflexion is defined as the point [F] wherever total product ceases to grow at a growing pace and begins to decrease. The marginal product of labour reaches its maximum vertically at this point of inflexion, after which it begins to decline. As the avg. product curve of the irregular factor grows during this phase, it is known as the stage of growing returns. The avg. product curve reaches its maximum peak at the end of this stage.

Second stage: Diminishing Returns

During this stage, the T.P grows slowly till it ranges its extreme point H when the 2nd stage finishes. Equally marginal product (M.P) and the avg. product of labour is decreasing at this point, but they are still positive. The fixed factor’s amount is insufficient compared to the variable factor’s quantity. The marginal product(M.P) of labour is 0 after the 2nd stage,  at point M, which parallels the extreme point H of total product arc T.P. This phase is critical because the company will strive to produce within this range.

Third stage: Negative Returns Stage

 As the total product decreases in stage iii, the {T.P] curve slants down. As a result, the marginal product of labour goes beneath the axis X, and the [M.P] curve is -ve. At this point, the variable aspect (labour) has outweighed the fixed factor.

Law of Returns to scale/ Returns to scale

 If all inputs are modified simultaneously (likely only in the long run) and assumed to be proportionally increased, the notion of returns to scale must be used to explain output behaviour. For example, in a factory, the size of operations may be raised in the long term by doubling the labour and capital inputs.When all production elements are modified in the same direction and proportion, the output behaviour is analysed. In the long run, increasing the scale of operations can boost production. The laws of returns to scale are the rules that regulate the size of a business.

 Conclusion

The production function demonstrates scientific linkages between tangible inputs and outputs and is classified as research. Returns to scale, which might be growing, decreasing, or constant, indicate changes in production efficiency due to scaling up productive inputs. On the other hand, returns to scale are solely a production and cost idea. The demand for the product must inform management’s judgement on what to create and how much to produce. As a result, demand and other considerations must be addressed while making decisions.