Page 166 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-8: Production Function and Law of Production

Notes
Fig. 8.2

Constant Returns to a Factor
Y Y
TP MP is Constant

Total Product TP Increases at Marginal Product MP

Constant Rate

O X O X
Units of Variable Factor Units of Variable Factor
(A) (B)

Above Fig. 8.2 (A) indicates an uprising TP curve which suggests that total production is increasing
by a constant rate. In Fig. 8.2 (B) the MP curve which is parallel to axis OX indicates that the marginal
production of variable factors is constant.

Causes of Constant Returns to a Factor

These are the following causes of constant returns to a factor:
(i) Optimum Utilization of the Fixed Factor: When production gets increased by using variable
factors then a time comes when the fixed factors have been utilized optimumly. In this case,
the marginal production is up to the variable factors and stable too.
(ii) Ideal Factor Ratio: When the variable and fixed factors are used to their optimum level then
it gives constant returns. In this situation, the marginal production of factors stabilizes in its
maximum value.
(iii) Most Efficient Utilization of the Variable Factor: When we use more units of variable factors
along with fixed factors then a time comes when we can do maximum division of labour. By this,
the variable factors like labour can be used in very efficient way and its marginal production
gets stable in its maximum level.

Situation 3: Diminishing Returns to a Factor or Law of Diminishing Returns

The Diminishing returns to a factor or law of diminishing returns is the situation when the total
production increases in falling rate if fixed factors or the variable factors with fixed units are used. In
this situation, the marginal production of variable factors gets low. In other words, the cost of marginal
production is increased.
According to Marshall, “An increase in the amount of capital and labour applied in the cultivation
of land causes, in general a less than proportionate increase in the amount of produce raised unless
it happens to coincide with an improvement in the art of agriculture.”
According to Boulding, “As we increase the quantity for any one input which is combined with fixed
quantity of other inputs, the marginal physical productivity of the variable input must eventually
decline.”

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