Page 165 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes (ii) Increase in Efficiency: According to Adam Smith, Marshall and Robinson, using of law of
variable proportions can increase the efficiency in various modes of production. The reason
behind this is that the possibility of division of labour and speciality increases by increasing
units of law of variable proportions. Efficiency gets its optimum by division of labour and
this maximizes the production ratio. According to Robinson, if the factors of production get
specialized means one factor only perform a single task then the expenditure of training, time
and machinery would be very much less. Due to this saving, the law of increasing returns to
factor will happen.

(iii) Better Coordination between the Factors: The use of increased number of variable factors make
better coordination between fixed and variable factors until the fixed factors of production are
used. Due to this, the total production increases by increasing rate.

Limitations
The fixed inputs get its minimum use in terms of variable inputs in the primary stage of production,
so when the fixed factor gets its maximum use by using more quantity of variable factors, the law of
increasing returns to factor amplifies. But this condition is not permanent. If increasing returns were
operative without limitations indefinitely, the world could be fed from a kitchen garden or a flower
pot simply by adding enough labour and capital to the fixed land. Due to this there would be no food
problem in any parts of world. But the law of increasing returns cannot be applied after a limit. After
a time, the marginal production cannot increase. The limit of increasing return is limit of a factor of
production. There would be a condition when every unit of variable factor correlates with less units
of fixed factor and production occurs. Due to this the marginal production gets less for extra units of
variable factors.

Situation 2: Constant Returns to a Factor

Constant returns to a factor means there is no increment in marginal production by using more units of
variable factors. In this situation, marginal production stabilizes. And due to this, the total production
increases in equal rate.

According to Hansen, “Constant returns to a factor occurs when additional applications of the
variable factor increases output only at a constant rate.”
Illustration: The law of Constant Returns to a Factor can be described by Table 2 and Fig. 8.2

Table 2: Constant Returns to a Factor
Units of Labour Units of Capital Total Production (in metre) Marginal Production (in metre)
6 1 52 12

7 1 64 12
8 1 76 12
9 1 88 12

10 1 100 12

By Table 2 we can understand that the total production increased gradually as more labour is added
with fixed units of capital means the marginal production is constant for variable factors.

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