The Law of Diminishing Marginal Product depicts a specific system, where an increase in any one production variable while keeping other variables constant, will initially increase overall production of the system. However, a further increase in that particular variable will generate lesser returns.
In simple terms, as per the law of diminishing marginal product or productivity, increasing only one factor of production for a particular unit will bring in more returns but only past a certain point of increase. This law does not always imply that addition of production variables will decrease overall productivity in the long run, but it is usually the case.
For example, an agricultural company is hiring labourers to increase their production of crops. However, they are on a fixed budget, and their profits are used to keep these workhands on the payroll. A graph is illustrated below to see the outcome of the returns.
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From this example, it can be determined that with an increase in new labours, there was a certain increase in both output and productivity. However, with the addition of the 5th and 6th labourer, overall productivity started to decline. Here, diminishing returns are taking place on exceeding 4 labourers for this agricultural company.
So, with the help of this example of law of variable proportion definition, it is clear that the law of diminishing marginal productivity affects all types of businesses that make alterations in their inputs to yield a higher output. Occurrence of this phenomenon suggests that this company cannot make use of the maximum labourers or machinery it can afford in order to improve efficiency. So, every company, which aims to be as much cost-efficient as possible, is required to know when Diminishing Marginal Productivity will affect their business.
Also referred to as the Law of Proportionality, the Law of Variable Proportion in economics concerns itself with how the output of a system alters with an increase in the number of units of a production variable, thus expressing the features of a changing factor-ratio proportion of the concerned output.
In simple terms, this law exhibits propionate increase of variable factors of a system in relation to its generated output during shorter terms. The most important criteria for conducting such analysis is keeping all other factors a system constant. So, this relationship between the input and output is also considered as Returns to the Variable Factor.
The law of variable proportions is based on these following assumptions –
It is assumed that the state of technology is constant and is not improving or degrading during alterations of production variables.
If there is an improvement or degradation in the technology adopted by a company for its production unit, it will be impossible to get a clear understanding how a change in the production variables are affecting the overall output.
As per this law, production factors are assumed to be variable. If all production variables are considered as a fixed proportion in relation to the output, this will be invalid.
All the units of the variable factor are regarded as homogenous. This indicates that each and every unit is of identical quality and quantity and amount to an identical figure.
The law of variable proportions only works for systems operating short-term where it is not feasible to alter every production input.
The three stages of this law require an example for an easier explanation. Let us assume that an agricultural company has 100 acres of land and 10 units of labour for production. So, the land to labour ratio is currently at 10:1. However, increasing the units of labour to 20, this ratio now becomes 5:1.
In the diagram below, the objective is to find TPP or Total Physical Product and MPP, which is the Marginal Physical Product.
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From this example, it can be determined that –
During Stage 1, both TPP and MPP are increasing at a given rate on increase in the variable inputs, i.e. the units of labour for the given acre of land.
On Stage 2, TPP is found to increase but at a diminishing rate. In case of the MPP, it decreases with an increase in the number of labour units. At a certain period during this stage, TPP will reach its maximum value while MPP is about to hit 0.
During Stage 3, TPP will carry on decreasing while MPP will decrease further and become negative.
So, it can be concluded that, the law of variable proportion states that successive units of variable input will lead to a decreased overall output as there will be fewer input variables to work with.
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1. Explain the law of Variable Proportion.
Ans: The law of variable proportion expresses the feature of the changing factor-ratio of the output of a system in relation to its increasing input factor variable. This law exhibits a proportional increase of the input variable respective to its generated output in the long run.
2. Explain the Law of Diminishing Returns.
Ans. According to the law of diminishing returns, an increase in only one input production factor of a specific system will initially bring in increased returns only up to a certain extent. After a particular point of increase in the input variable, the overall returns will start to decline.
Hence, for any production unit, use of the maximum labour and machinery it can afford to generate more profits and improve efficiency will only help up to a certain point but will gradually fall in the upcoming periods.
3. What is the Law of Variable Proportion?
Ans. The law of variable proportion showcases the change in the output of a system which alters with an increasing variable input factor.
4. What is the Law of Diminishing Marginal Product?
Ans: The law states that with an increase in any one variable factor while keeping others constant, will initially generate higher returns to a certain extent, but any further increase will inevitably generate comparatively lesser returns.