Page 107 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics Tanima Dutta, Lovely Professional University

Notes Unit 8: Laws of Production

CONTENTS

Objectives
Introduction
8.1 Law of Variable Proportions or Law of Diminishing Returns (Short Run)
8.1.1 Three Stages of Production
8.1.2 Optimal use of Variable Input

8.2 Law of Returns to Scale (Long Run)
8.3 Summary
8.4 Keywords
8.5 Self Assessment

8.6 Review Questions
8.7 Further Readings

Objectives

After studying this unit, you will be able to:
State the law of variable proportions

Explain the behaviour of a firm during three stages of production
Assess how a variable input is used/ can be used optimally
Paraphrase the law of returns to scale
Identify the reasons for returns to scale

Introduction

In this unit, we will discuss the laws of production. In the short run, the law of diminishing
returns states that as we add more units of a variable input (i.e. labour or raw materials) to fi xed

amounts of land and capital, the change in total output will at first rise and then fall. Diminishing
returns to labour occurs when marginal product of labour starts to fall. This means that total
output will still be rising – but increasing at a decreasing rate as more workers are employed. In
the long run, all factors of production are variable. How the output of a business responds to a
change in factor inputs is called returns to scale.

8.1 Law of Variable Proportions or Law of Diminishing Returns
(Short Run)

If all inputs of a fi rm are fixed and only the amount of labour services differs, then any decrease
or increase in output is achieved with the help of changes in the amount of labour services used.
When the firm changes the amount of labour services only, it changes the proportion between the

fixed input and the variable input. As the firm keeps on changing this proportion by changing the

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