Page 164 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-8: Production Function and Law of Production

Notes
Table 1: Increasing Returns to a Resource
Units of Labour Units of Capital Total Production Marginal Production

1 1 4 4
2 1 10 10 – 4 = 6
3 1 18 18 – 10 = 8

4 1 28 28 – 18 = 10
5 1 40 40 – 28 = 12

From the above table we can know that when more units of labour are used with the fixed capital then the
total product is increasing in increasing rate. The marginal production of variable factors is also increasing.

Fig. 8.1

Increasing Returns to a Factor
(A) (B)
Y Y
TP MP
TP tends to MP tends to
increase at
Total Product the increasing Margninal Product
increase
Rate

O X O X

Units of Variable Factor Units of Variable Factor

Figure 8.1 (A) states that the total production increases in increasing rate while Fig. 8.1 (B) indicates that
the marginal production of variable factors is increasing.

Causes of Increasing Returns to a Factor
The Causes of Increasing Returns to a Factor are follows—
(i) Under–Utilization of Fixed Factor: The fixed factors of production like machine is used less
in primary stage of production. For full use of this, there’s needed more variable factors like
labour. So the total production increases by using more numbers of variable factors in initial
stage of production. In other words, the marginal production of variable factors is increased.
For example, to make cloth, a small plant is used. The size of plant would stable in short run.
To get maximum production, there is need of 5 workers in this plant. If there are only 1 or 2
workers work in this plant, then the full use of this plant would not happen. But when gradually
the number of workers would increase by 5 then production will also increase to its optimum
level. By this, the marginal production of every unit of worker would increase and thus, the
total production will also increase.

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