Page 118 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 8: Laws of Production

8.3 Summary Notes

This means that upto the use of a certain amount of variable factor, marginal product of
the factor may increase and after a certain stage it starts diminishing. When the variable
factor becomes relatively abundant, the marginal product may become negative.

The law of variable proportion of says that as more and more of the factor input is employed,
all other input quantities remaining constant, a point will eventually be reached where
additional quantities of varying input will yield diminishing marginal contributions to
total product.

Returns to scale are classified as: Increasing Returns to Scale (IRS), Constant Returns to
Scale (CRS) and Decreasing Returns to Scale (DRS).
Increasing Returns to Scale occurs if a proportional increase in all inputs under the control
of a firm results in a greater than proportional increase in production.

Decreasing Returns to Scale occurs if a proportional increase in all inputs under the control
of a firm results in a less than proportional increase in production.

Constant Returns to Scale occurs if a proportional increase in all inputs under the control

of a firm results in an equal proportional increase in production.
8.4 Keywords

Law of variable proportions: refers to how the marginal production of a factor of production
starts to progressively decrease as the factor is increased, in contrast to the increase that would
otherwise be normally expected
Law of returns to scale: it explains the changes in production that occur when all resources are
proportionately changed in the long run
Long-run: The time period when all inputs become variable.
Production function: A function that states the maximum amount of an output that can be
produced with a certain combination of inputs, within a given period of time and with a given
level of technology.
Short-run: The time period during which at least one input is fi xed.
Variable inputs: Inputs that can be varied easily and on very short notice.

8.5 Self Assessment

Fill in the blanks:
1. As per Law of Variable Proportions, when MP is equal to AP, AP is at its .....................
2. In the third stage of Law of Diminishing Returns, there are ..................... marginal returns.
3. A sensible firm would like to operate in the ..................... stage of production.

4. In ..................... stage of production, any additional input employed would lead to a fall in
output.
5. In ..................... returns to scale, the proportionate increase in input is not equal to the
proportionate change in output.

6. As we added more and more of variable input to a fixed input, the amount of extra product
will .....................

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