Law of Variable Proportion is regarded as an important theory in Economics. It is referred to as the law which states that when the quantity of one factor of production is increased, while keeping all other factors constant, it will result in the decline of the marginal product of that factor.
Law of variable proportion is also known as the Law of Proportionality. When the variable factor becomes more, it can lead to negative value of the marginal product.
The law of variable proportion can be understood in the following way.
When variable factor is increased while keeping all other factors constant, the total product will increase initially at an increasing rate, next it will be increasing at a diminishing rate and eventually there will be decline in the rate of production.
Assumptions of Law of Variable Proportion
Law of variable proportion holds good under certain circumstances, which will be discussed in the following lines.
- Constant state of Technology: It is assumed that the state of technology will be constant and with improvements in the technology, the production will improve.
- Variable Factor Proportions: This assumes that factors of production are variable. The law is not valid, if factors of production are fixed.
- Homogeneous factor units: This assumes that all the units produced are identical in quality, quantity and price. In other words, the units are homogeneous in nature.
- Short Run: This assumes that this law is applicable for those systems that are operating for a short term, where it is not possible to alter all factor inputs.
Stages of Law of Variable Proportion
The Law of Variable proportions has three stages, which are discussed below.
- First Stage or Stage of Increasing returns: In this stage, the total product increases at an increasing rate. This happens because the efficiency of the fixed factors increases with addition of variable inputs to the product.
- Second Stage or Stage of Diminishing Returns: In this stage, the total product increases at a diminishing rate until it reaches the maximum point. The marginal and average product are positive but diminishing gradually.
- Third Stage or Stage of Negative Returns: In this stage, the total product declines and the marginal product becomes negative.
This concludes the topic of Law of Variable Proportions, which is an important concept for the students of Commerce. For more of such interesting articles, stay tuned to BYJU’S.