Sandeep Garg Microeconomics Class 12 Solutions Chapter 5

1. Efficient Utilization of The Fixed Factors: At the first stage, when more variable factors are employed to increase the output, then the fixed factors (say, some machines) can be utilized more efficiently. The productive capacity of the fixed factors can be utilized in a better way. For example, a machine can produce 200-meters of cotton cloth per day. If one worker can operate that machine and works for 8 hours per day, the productive capacity of that machine cannot be fully utilized by employing only one worker. If another worker is employed, the machine can run for another 8 hours. As a result, the output can be increased at a steady rate.

2. Technical Division of Labor: If labor is regarded as the only variable factor, then the increased amount of labor can also lead to a technical division of labor at the initial stage. It increases the marginal product of labor. For example, a power loom factory may have 8 power looms and it requires at least four weavers per shift (8 hours per shift) for the proper operation of these looms. This factory also requires another two workers to operate the yarn-reeling machine. Thus, with the increase in labor employment at the initial stage in this factory, some of them will operate the reeling machines, while some others will operate the power looms. This leads to technical division of labor. This process helps in carrying out the whole production process in a smooth way and leads to increasing return to variable factors.

3. Better Coordination between The Factors of Production: At the initial stage, the fixed factor remains under-utilized. So, additional employment of the variable factor (i.e., Labor) leads to better coordination between the fixed and variable factors. Thus, the variable factors can be systematically engaged to operate the fixed factor. This also raises the marginal product of the variable factor,

Reasons Behind the Operation of Diminishing Returns to a Variable Factor in Short Run Production:

1. Employing Variable Factor Beyond The Optimum Proportion: The efficient utilization of the fixed factors becomes possible only when we reach the optimum factor proportions (i.e., an optimum combination of man and machine in our case) If two automatic power looms can be operated by a single weaver, then the optimum proportions in which capital (K) (Or machine) and labor (L) has to be employed, will be 2:1. If more weavers are employed then there will be confusion in the whole system. Extra workers may just remain idle since they may not have adequate fixed factors to work. In such cases, there will be a diminishing return to the variable factor.

2. Imperfect Substitution Possibilities between Factors: Different factors of production (say, man and machine) are not perfect substitutes. So, when more and more laborers are employed keeping the plant and types of machinery unchanged, then increased numbers of workers are not supposed to perform the same work as would have been possible with an extra amount of capital. As a result, there would be a diminishing return to the variable factor. (i.e., Labor).

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