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Q. No. 13 (c): Explain the Law of Constant Return. Also discuss its assumptions. Answer:

LAW OF CONSTANT 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. LAW OF CONSTANT RETURN: A production process in which MP and AP remains constant witht eh employment of variable factor is known as constant. DEFINITION: Law of decreasing 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 constant rate, is called law of constant 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 --------Explanation:
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Variable Factor (Labour) 1 2 3 4 5

Total Production (TP) 50 100 150 200 250

Marginal Production (MP) 50 50 50 50 50

AP=

TP L

50/1=50 100/2=50 150/3=50 200/4=50 250/5=50

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The above schedule shows when first unit of labour is applied on fixed factor of production, MP is 10. when variable factor increases from 1 unit to 2 units, MP and AP remains same. Similarly 3rd, 4th, and 5th units of labour shows no change in MP as well as AP Here total production is increasing at constant rate. Law of constant return is also known as law of constant cost. DIAGRAM:
y-axis

100 AP & MP 50 MP = AP

1 2 3 4 Units of Variable Factor 5 (Labour)

x-axis

In the above diagram units of variable factor are measured along x-axis e MP and AP is taken on y-axis MP and AP curves are horizontal because with the increase in units of variable factors MP and AP remain constant. 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: Change in method of production will change marginal production. This charges occurs due to improvement in technology but not due to variable factors. 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 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

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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. 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 INCREASING COST

Cost.

Q. No. 13: Explain Law of Increasing Assumptions and application. Answer: SCHEDULE: Fixed Factors of productio n 10 Acres --------Variable Factors of Production 1 2 3 4 5

Also

discuss

its

TP 50 10 0 15 0 20 0 25 0

MP 50 50 50 50 50

AP 50/1=50 100/2=5 0 150/3=5 0 200/4=5 0 250/5=5 0

MC=

Per unit cost MP

AC=

Per unit Cost AP

100/50=2 100/50=2 100/50=2 100/50=2 100/50=2

100/50=2 100/50=2 100/50=2 100/50=2 100/50=2

DIAGRAM:

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Economics Notes
y-axis

AC & MC 2 MC = AC

1 2 3 4 Units of Variable Factor 5 (Labour)

x-axis

Explanation: In the above diagram units of variable factors of production are measured along x-axis while MC and AC are taken on y-axis. MC and AC remains same with every increase in units of labour. This is the reason that MC and AC curves are same and parallel to x-axis.

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