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EUROPA SCIENCE & COMMERECE ACADEMY

Economics Notes
Q. No. 13: Explain application. Answer: Law of increasing return. Also discuss

its

LAW OF INCREASING RETURN


INTRODUCTION: Law of return means the law under which return in the form of goods and services are obtained by using combination of four factors of production. The factors of production are of two types. a. Fixed factors of production. b. Variable factors of production In short run fixed factors remains same while variable factors can change the level of output. When the units of factors can change the level of output. When the units of variable factors of production are employed on the fixed factors of production the marginal product (MP) and Average product (AP) may increase, remains constant and may decrease. DEFINITION: Law of increasing return can be defined as: Other things remaining same when additional units of variable factors of production are applied on fixed factors of production, total production increases at increasing rate, is called law of increasing return. Explanation: In order to explain this law we take example of a land of 10 acres. Suppose per unit cost of variable factors of production is Rs. 100/-. SCHEDULE: Fixed Factors (Land) 10 Acres --------Variable Factor (Labour) 1 2 3 4 5 Total Production (TP) 10 30 60 100 150 Marginal Production (MP) 10 20 30 40 50
AP= TP L

10/1=10 30/2=15 60/3=20 100/4=25 150/5=30

Explanation: The above schedule shows that when first unit of labour is applied on fixed factor of production, MP is 10. When 2nd units of labour is applied MP increases from 10 to 20. similarly 3rd, 4th & 5th units of variable factor gives more output. The total production is increasing at increasing rate. Law of increasing return is also called law of diminishing cost. Because with the increasing of in MP and AP both MC and AC fall.
Composed & Designed By: Basit butt

EUROPA SCIENCE & COMMERECE ACADEMY


Economics Notes
DIAGRAM:
yaxis 50 45 40 35 MP & 30 25 AP

MP

AP 20 15 10 5 0 1 xaxis 2 3 4 5 Units of Variable Factors (Labours)

In the above diagram units of variable factors are measured along x-axis while MP and AP is taken on y-axis. There exist a direct relation between labour and MP as well as with AP. Due to the direct relation MP and AP curves are positively sloped. ASSUMPTION: This law holds under the following assumptions. 1: No change in fixed factors of production: This law is based on the assumption that there is no change in fixed factor of production. 2: No change in method of production: If new and better methods of cultivation are discover MP will increase due to better technology but not due to variable factor. 3: Homogeneous Units: It is assumed that the units of variable factors of production are homogeneous. 4: Optimum Combination: This law holds if stage of optimum combination has not been reached. 5: Factors are Perfectly Substitutes: It is further assumed that the factor of production is perfectly substitutes. APPLICATIONS OF THE LAW: These are as follows: 1: Internal and External Economics: There are certain advantages which can provide benefits from the scale of production. These advantages are called internal and external economics of scale. Division of labour is internal economy while specialization of labour is external economy. These economies are increasing function of production. 2: Supply of Factors: In industrial sector, supply of factors is elastic. Essential factors are supplied to produce more output.
Composed & Designed By: Basit butt

EUROPA SCIENCE & COMMERECE ACADEMY


Economics Notes

3: Modern Machinery and Techniques: In industrial sector modern techniques and machines are used to produce more out put. More output can be produced by adopting better technology. 4: Optimum Combination of Factors: Industrial sector is more under control of human beings as compared agriculture. Entrepreneur can put business under the law for a long time due to his experience, skills and administrative abilities.

LAW OF DIMINISHING COST


Q. No. 13: Explain application. Answer: the introduction, definition, will be same as above defined. Only use the word diminishing cost instead increasing return. SCHEDULE: Fixed Factors of productio n 10 Acres --------DIAGRAM:
y-axis 1 0 8 MC & 6

Law

of

Diminishing

Cost.

Also

discuss

its

Variable Factors of Production 1 2 3 4 5

TP 10 30 60 10 0 15 0

MP 10 20 30 40 50

AP 10/1=10 30/2=15 60/3=20 100/4=2 5 150/5=3 0

MC=

Per unit cost MP

AC=

Per unit Cost AP

100/10=10 100/20=5 100/30=3.3 100/40=2.5 100/50=2

100/10=10 100/15=6.7 100/20=5 100/25=4 100/30=3.3

AC 4 2 0 1 2 3 4 Units of V. F. O. P (Labour) 5

AC MC x-axis

Explanation:
Composed & Designed By: Basit butt

EUROPA SCIENCE & COMMERECE ACADEMY


Economics Notes

In the above diagram, units of variable factors of production are taken on xaxis while MC and AC are measured along y-axis. Both MC and AC curves are negatively sloped because MC and AC are decreasing with every increase in labour MC is falling faster than AC, this is the reason that MC curve is below than AC curve.

Composed & Designed By: Basit butt

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