THE LAW OF VARIABLE PROPORTION OR LAW OF DIMINISHING MARGINAL PRODUCT
The short run production function is called The law of variable proportion or law of diminishing marginal product. In short run, the producer can change the quantity of output only by changing the quantity of only one variable factors i.e. labour. Law of Diminishing marginal product (Law of Variable Proportions) states the relationship between the variable input and the output in the short run. By definition certain factors of production (e.g.-Land, plant, machinery etc.) cannot be changed to increase production. Such factors are called fixed factors. To increase production the producer can change some factors they are known as variable factor. In short-run, In other words, firms can employ varying quantities of variable inputs against given quantity of fixed factors. This kind of change in input combination leads to variation in factor proportions. The Law which brings out the relationship between varying factor proportions and output are there fore known as the Law of variable proportions..The variation in inputs lead to a disproportionate increase in output more and more units of variable factor when applied cause an increase in output but after a point the extra output will grow less and less. The law which brings out this tendency in production is known as‟Law of Diminishing Returns`. This law states that any attempt to increase output by increasing only one factor finally faces diminishing returns. The Law states that when some factor remain constant, more and more units of a variable factor are employed the production may increase initially at an increasing rate; but after a point it increases only at diminishing rate. Land and capital remain fixed in the short-term whereas labour shows a variable nature. The following table explains the operation of the Law of Diminishing Returns.
First Stage: First stage starts from point ‘O’ and ends up to point S (‘ON’ amount of variable input in the graph.) At point S average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate. Similarly marginal product also increases initially and reaches its maximum and Later on, it begins to diminish and becomes equal to average product at point S. In this stage, marginal product exceeds average product (MP > AP).We can see that in the table total product, average product, and marginal product increases but average product and marginal product increases up to 40 units of MP. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. This is the end of the first stage.
Second Stage: The second stage starts from where the first stage ends or where AP=MP. In this stage, average product and marginal product start falling. We should note that marginal product falls at a faster rate than the average product. Here, total product increases at a diminishing rate. It is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative. It begins from the point S. In this stage, total product increases at diminishing rate and is at its maximum at point ‘H’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘M’. Average product is maximum and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP < AP).
Third Stage: The third stage begins where second stage ends. This starts from 8th unit of labour. Here, marginal product is negative and total product falls but average product is still positive. At this stage, any additional dose leads to negative marginal product. This stage begins beyond point ‘H’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only
