Laws of Production

In this article, we will learn about “Laws of Production”. Study about the various routes of production and quality enhancement through the law of production. This article is very useful for SSC and Banking exams. Bookmark this article for future use.

Laws of Production

• The production laws describe the technically possible ways to increase the level of production. Production can be increased in various ways.
• Production can be increased by changing all means of production. This is only possible in the long term. Thus, the Law of Return to Scale refers to the long-term analysis of production.
• In the short run, the output can be increased by using more variable factors, while holding capital (and possibly other factors as well) constant.
• The marginal product of variable factors will eventually decrease as more and more of these factors are combined with other constant factors. The expansion of output with (at least) constant factor is described by the law of (eventually) diminishing returns to variable factor, often called the law of variable proportions. 
• The laws of production in economics are related to the concepts of cost and equilibrium of producers. It is an important aspect of economics as it helps the company determine the level of production that leads to maximum profit. It also defines the various fixed and variable costs of the business.
   

The Two Laws of Production are as follows:

1. Law of variable proportions
2. Law of return to scale

1. Law of Variable Proportions

The law of variable proportion is considered an important principle in economics. This is known as the law that states that when the quantity of a factor of production increases while holding all other factors constant, there will be a fall in the marginal product of that factor. 
The law of variable proportion is also known as the law of proportionality. When the variable factor is exceeded, it can lead to a negative value of the marginal product.
 The law of variable proportion can be understood as follows.

• When the variable factor increases keeping all other factors constant, the total product will initially increase at an increasing rate, then it will increase at a decreasing rate, and 
• finally, the rate of production will decrease. 
   

Assumption of the law of variable proportions

The law of variable proportions is fulfilled in certain circumstances, which will be discussed in the following lines.

1. Continuous State of Technology: It is believed that the state of technology will remain stable and production will improve with the improvement of technology.
2. Relationship of variable factors: it is assumed that the factors of production are variable. If the means of production are fixed, then the law is invalid.
3. Homogeneous factorial units: All units produced are assumed to be equal in quality, quantity, and price. In other words, the units are homogeneous.
4. Short run: This assumes that this law is applicable for systems that operate in the short run, where it is not possible to change all factor inputs.
    

Steps of the Law of Variable Proportions

The law of variable proportions has three steps, discussed below.
1. The first stage or stage of increasing returns: In this stage, the total product increases at an increasing rate. This is because adding variable inputs to output increases the efficiency of the fixed factors.
2. The second stage or stage of diminishing returns: In this stage, the total product increases at a decreasing rate until reaching a maximum point. Marginal and average products are positive but gradually decrease.
3. Third stage or stage of negative returns: In this stage the total product decreases and the marginal product becomes negative.

2. Laws of Returns to Scale

The law of variable proportions arises because as one factor remains unchanged and the other increases, the ratio of the factors changes. What if both factors can change (vary)?

• Always remember that this can only happen in the long run. In the long run, a special case is when both factors are altered by an equal number of factors.
• When a proportional increase in all inputs results in an equal proportion of an increase in output, the production function is said to exhibit constant returns to scale (CRS). 
• When a proportional increase in all inputs results in an increase in output by a large proportion, the production function is said to exhibit increasing returns to scale (IRS). 
• Diminishing returns to scale (DRS) occurs when a proportional increase in all inputs results in a small proportional increase in output.
• For example, suppose that in a manufacturing process, all inputs are duplicated. As a result, if production is duplicated, the manufacturing process exhibits CRS. If the output is less than double, there is DRS; if it is more than double, there is IRS.