Page 168 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-8: Production Function and Law of Production

6. The variable factors of production are the factors by which the quantity can be changed in ..................... Notes
(a) long run (b) short run (c) middle run (d) none of these
7. The changes in variable factors in short run can increase the production ..........................

(a) short (b) increment (c) marginal (d) none of these

8.10 Causes of Diminishing Returns to a Factor

These are the following causes of diminishing returns to a factor:
(i) Fixity of Factors: The main cause to apply of this rule is that at least one factor of production is
fixed. When this fixed factor is used with variable factors then the ratio of it declines with the
variable factors. So when a unit of variable factors works with low constant fixed factor then
the marginal production of variable factors gets decreased.
(ii) Imperfect Factor Substitutability: According to Ms. Joan Robinson, the main reason of law of
diminishing returns to a factor is imperfect substitute of factors in production. A factor cannot
replace another at all. So when we do the optimum uses of fixed factors, then we cannot take
another factor inspite of optimized fixed factor. This imbalances the variable and fixed factors
and the marginal production gets decline for variable factors.
(iii) Poor Coordination Between the Factors: By increased using of variable factors with fixed factors,
the ideal factor ratio decreases. This affects badly to the ratio of variable and fixed factors and
the marginal production of variable factors gets down. This coordination is so poor that it affects
the total production level. Due to this, the marginal production of variable factors can be zero
or can be negative.

Importance of the Law

The law of diminishing returns is a very important law of economics. The importance is indicated by
the following—
1. Basis of the Theory of Population: The theory of population of Malthus is based on this law.
According to Malthus, the increment of food is less than population. This is just because the law of
diminishing factors gets involved in farming.
2. Basis of the Theory of Rent: The theory of rent of Ricardo is also based on this law. The first unit of
production on land by labour and capital is more than the second unit. The difference of this unit
of production is called rent.
3. Based on the Theory of Distribution: The theory of distribution is also based in this law. As a factor
of production uses in its maximum, the marginal productivity gets low and the income also declines.
4. Based of Equilibrium Production: A producer can know the quantity of equilibrium production by
the help of this law. The equilibrium production happens on that point where the increased level
of marginal production is equal to marginal income.

8.11 Three Stages of Production

Under this law of diminishing factors, the economists have given three stages of production. These are
(i) Increased level of Returns, (ii) Equal level of returns and (iii) Negative level of returns. This is
described by Table 4 and Fig. 8.4.

LOVELY PROFESSIONAL UNIVERSITY 161