The Concept of Law of Return

 

There is a study of the relationship between the inputs and the outputs which is known as the theory of production. whereas theory of costs is the study of the relationship between the output and cost of production. 

This theory of cost and the theory of production give a further understanding of the transactions in any economy and thus become important concepts. Thus, students mostly need assignment help to understand the same. 

Production in an economy is the act of making goods and services and also adding utility to the object which makes the object useful. 

Production function refers to the maximum quantity of a commodity which is produced at a particular time through the given amount of inputs at the time when the best production techniques available were used. 

It is expressed with a particular period of time. It expresses a physical relation between inputs and outputs. Production function purely describes the technical relationship between input and output.

There are various types of production functions important to be noted for help in homework or assignment help in Economics:

• Short-run production function: 

When only one input is kept variable while all the others are assumed to be constant, then that situation is called a short-run production function. It is a subject matter of returns to a factor.

• Long-run Production function: 

Long-run production function refers to a situation when all the inputs which were used in producing a commodity are changed simultaneously in the equal proportion. It is a subject matter of returns to scale.

Basic Concepts: –

• Total product: 

Total product is the total amount of a commodity which can be produced by combining a particular quantity of variable factor with the quantity of fixed factor, which is given, in a specific period of time.

• Average product: 

The output per unit of variable is known as average product.

• Marginal product: 

Marginal product refers to a change in the total product due to use of one additional unit of a variable factor.

Returns to a factor:

 It refers to a change in output when only one factor is increased while the other remains constant. It operates in the short-run and is associated with the short-run production function. Returns to a factor has three possibilities: 

• Increasing returns to a factor: 

It is a situation when total output is added more and more amount by each unit of variable factor which is combined with a fixed factor.

• Constant returns to a factor: 

It is a situation when total output is added some amount by each unit of a variable factor when the variable factor has its marginal product constant.

• Diminishing returns to a factor: 

It is a situation when total output is added to a lesser and lesser amount by each unit of variable factor when the marginal product of factor falls when more of it is used.

Law of variable proportion

This law tells us that total product might increase at an increasing rate initially and it might decrease at a diminishing rate eventually 

when more and more units of variable factor are used on the quantity of fixed factor which is given. This law has some assumptions too, which are as follows:

• It is assumed that technology is being given to us which remains unchanged.
• It is being assumed that there are some inputs which are kept fixed while others are kept variable.
• It is assumed that technology allows change in variable factors.
• It is being assumed that all the units of variable factor are equally efficient and homogeneous.

Explanation of the law of Variable Proportion: –

• Causes of increasing returns: 

There are the following reasons which tells us about the increasing returns in Stage 1:

• Fuller utilization of fixed factors: 

Whatever be the level of output, a certain minimum quantity of fixed factor is mandatory to be used, due to technical reasons. Hence, to make optimum use of the fixed factor, certain minimum labor is required. 

Thus, if the number of laborers is increased, the fixed factor is utilized better and more efficiently which results in an increase in the variable factor’s marginal product. 

• Increase in efficiency: 

the efficiency of variable factors increases with increase in the number of variable factors which also leads to division of labor and specialization becoming possible. The labor can work according to their skills and attitude which results in an increase in their efficiency. 

• Causes of diminishing return: 

This return arises due to the following reasons:

• Disturbing the optimum proportion: 

As we increase the variable factor in quantity of fixed factor, output increases, but this will happen only up to optimum point of production 

where fixed factors work in their fixed productive efficiency. Even if the variable factor is increased beyond this point, the total product will decrease rather than increase. 

• Imperfect Substitutability of Factors of Production: 

In order to increase the production of a commodity, factors of production can only be substituted only up to a certain level.

If we try to keep on substituting one factor for another, the total product will decrease rather than increase. 

• Causes for negative return: 

The concept of negative return in Stage 3 can only be explained with the following points:

• Overcrowding: 

if only variable factor is increased for a given quantity of a fixed factor, it will hinder the working of variable factor as there will be lower availability of tools and equipment 

which will reduce productivity. Too many workers will come in each other’s way which causes delay and disturbance, as a result, reduced production. 

• Management problem: 

When there are too many workers, it becomes difficult for the management to supervise, direct and coordinate them. The laborers may avoid them which might decrease their efficiency. 

If you understand the law of return and the theories behind it then you can easily understand the concepts of market functioning and thereby the functioning of any economy. 

The points mentioned above can easily facilitate the learning of these concepts and provide help in homework to students facing difficulties.