What do you understand by returns to a factor? State the reasons for diminishing returns to a factor.
What do you understand by returns to a factor? State the reasons for diminishing returns to a factor.
Returns to a factor relates to the behaviour of total output as one variable input, say labour, is varied. It is a short-run concept. There are three aspects of returns to a factor:
(i) Increasing Returns to a Factor
(ii) Constant Returns to a Factor, and
(iii) Diminishing Returns to a Factor.
Diminishing returns to a factor refers to a situation in which the total output tends to increase at the diminishing rate when additional units of the variable factor is combined with the fixed factors of production. Diminishing returns to a factor may occur due to following reasons:
(i) Fixed nature of the factor: Fixed nature of factor(s) is the principal cause that explains thc occurrence of diminishing returns to a factor. As more and more units of the variable factor continue to be combined with the fixed factor, the latter gets overutilised.
(ii) Imperfect substitution: Factors of production are imperfect substitutes of each other. More and more of labour, for example, cannot be continuously used in place of additional capital. Accordingly, diminishing returns to the variable factor becomes inevitable.
Returns to a factor relates to the behaviour of total output as one variable input, say labour, is varied. It is a short-run concept. There are three aspects of returns to a factor:
(i) Increasing Returns to a Factor
(ii) Constant Returns to a Factor, and
(iii) Diminishing Returns to a Factor.
Diminishing returns to a factor refers to a situation in which the total output tends to increase at the diminishing rate when additional units of the variable factor is combined with the fixed factors of production. Diminishing returns to a factor may occur due to following reasons:
(i) Fixed nature of the factor: Fixed nature of factor(s) is the principal cause that explains thc occurrence of diminishing returns to a factor. As more and more units of the variable factor continue to be combined with the fixed factor, the latter gets overutilised.
(ii) Imperfect substitution: Factors of production are imperfect substitutes of each other. More and more of labour, for example, cannot be continuously used in place of additional capital. Accordingly, diminishing returns to the variable factor becomes inevitable.
