Significance of the law

Despite the weakness,the law of variable proportion in universal in application.Marshall and his followers believed that the law of increasing returns is applicable in manufacturing industries while the law of diminishing returns is applicable in agriculture.But this is not true.When a factor is increased keeping constant the other factors,the level of technology being held constant the product definitely decrease both in agriculture and industry.
This law has proved to be true empirical evidence.As opined by Fritz Machlup - "That people do not grow all the crops they want in just a few little flower pots is sufficient proof for the existence of diminishing returns."According to R.C. Lipsey -"Indeed,were the hypothesis of diminishing returns incorrect,there would need it a food crisis."The improvement in technology can postpone the operation of this law for the time being but cannot completely check the operation of this law.
It is be noted that although this is applicable equally in both agriculture and manufacturing,the operation of the law of diminishing returns can be postponed in manufacturing due to rapid development technology.But,the law operates due to the predominance of nature.
The law of diminishing returns operates in industry in a country like Nepal due to the non-development or slow development of technology.It some of the developing countries cost is decreasing and out put is increasing due to the development of technology.But the operation of this law is inevitable if 'technology remains constant' as assumed by this theory.Hence,the increase in production is necessary to meet the demand of growing population.
The law of variable proportion is of special significance in economic theory.Because some of the laws of economics are based directly on this law.For example,the Ricardian theory of rent and the Malthusian theory of population are based on this law.According to Ricardo since the law of diminishing returns operates in agriculture,even inferior land should be cultivated.On account of this superior by the growing population cannot be met due to the operation of the law of diminishing returns in agriculture.He has thus pointed out the need to check population by various methods.

Law of variable proportions

The law of variable proportions is one of the important laws of economics.It is new name for the law of diminishing returns.The economists like Marshall,Benham,Samuelson,Mrs.Joan Robinson have contributed to the development of this law.This law shows the short run input relation.The gist of this law is that if the quantity of factors is increased keeping constant the quantity of other factors,eventually the marginal and average product decline.
According to C.E. Ferguson -"As the amount of variable input is increase,the amount of other inputs held constant,a point is reached beyond which marginal product declines."
Likewise,in the worlds of W.J. Baumol -"As more and more of some input is employed,all other input quantities being held constant,eventually a point will be reached where additional quantities of input will yield diminishing marginal contribution to total product."
The clear example of this law can be found in agriculture production.In agriculture,if we keep the quantity of land fixed and go on increasing the quantity of labour,eventually the marginal product decline.

Production functiion

Production function shows technological or engineering relationship between output of a commodity and its input.In traditional economic theory,it is stated that are four of production.But technology also contributes to the increase in output.Hence,technology may be taken as an additional department of output.Thus,output is a function of land,labour,capital,organisation and technology.
In the worlds of Stigler -"the production function is the name given to the relationship between the rates of outputs of productive services and the rate of output of the product."
Similarly,in the words of Pappas Brigham-"Production function specifies the maximum possible output that can be produced for a given of outputs or,alternatively,the maximum quality of inputs necessary to produce a given level of output."
The production can be expressed symbolically as .

x=f (ld,l,k,m,t)
The above function shows the general production function.In specific situation,one or other of these factor may not be important.The relative importance of factors of production varies from one type of product to another.For example,land is more important in agriculture but not in manufacturing.Similarly,management and technology are more important in industrial production than in agriculture production.For example analysis of production decision problems,it is convenient to assume only two inputs for an output.If labour and capital are only two inputs,the production function is,
X=f (l,k)
This function has three variable i.e. necessary out put of X and units are labour and capital.
Both labour and capital are necessary for production and they are substitutes of each other.The entrepreneur will have to use both of them but would have an option to employ any one combinations of factors out of several possible combinations.The alternative combinations of factors for a given output level be such that if the use one input is increased,that of other will decrease and vice versa.
The alternative combinations of labour and capital for making 10 TV sets per day are illustrated below.

Labour Capital
5 20
6 17
7 15
8 13
9 11
10 10
The table shows that to produce 10 units of TV sets,either 5L and 20 K OR 6L and 7L and 15K etc,can be combined.

Derivation of total product,average product,marginal product curves.

The total product,average product and marginal product curves can be derived from the table.Suppose that wheat is grown on 10 ropani of land.The fixed input is land,the variable input is labour,and the out put is in quintal.The total product,average product and marginal product are as shown in the table.

Units of labour Total product Average product Marginal product
1 10 10.0 -
2 24 12.0 14
3 39 13.0 15
4 52 13.0 13
5 61 12.2 9
6 66 11.0 5
7 66 9.4 0
8 64 8.0 -2
The table shows the behaviour of total,average and marginal product of labour.The total product first increase,reaches maximum when 7th units of labour is used and then declines.The average and marginal product both increase in the beginning,reach maximum and decline.The marginal product is equal to average product,when average product is maximum.When marginal product is zero,total product is maximum.

Theories of production

It is conventional to define production as "the creating of utility."It points out that production embraces a wide range of activities and not only the preparation of material goods.Hence, rendering legal advice,writing a book,setting a motion picture are all examples of production.J.L. Hanson has thus rightly remarked "in economics,however,production is not restricted to the manufacture of commodities but also includes the provision of direct services.Such as those of the lawyer,the accountant,the actor,or musician etc."But everyday speech,the world production is often used ad is were synonymous with creating something.
It is difficult to supply the inputs used in producing the output of services.due to this,while production in a general senses refers to the creation of any goods or services people will buy,the concept of production is much clearer when we speak only of goods.Here it is simpler to specify the precise inputs and to identify the quantity and quality of output.As for example,producing a quintal of rice requires land,seeds,fertiliser,tools and human labour.Even today every act of production requires the input of human resources.The production normally requires capital equipments like machinery,tools and buildings,and raw materials,labour.In the worlds of J.P. Gould and E.P. Lazear "The theory of production consists of an analysis of how the entrepreneur -given the 'state of art' or technology combines various inputs to produce a stipulated output in an economically efficient manner."

Concept of elasticity of supply

Elasticity of supply like elasticity of demand is important in price theory.The change in price leads to the change in supply.The degree of change in supply due to the change in price is called elasticity of supply.To be more precise,the elasticity of supply can be defined as the proportionate change in quantity supplied to the proportionate change in price.
Hence,elasticity of supply is 2 or greater than unity.In general,since the price and the quantity move together,the elasticity of supply has positive more sing.When supply is elastic,the quantity supplied changes more than proportionately than change in price.On the other hand,if supply is inelastic,the quantity supplied changes less than proportionately than change in price.
The elasticity of supply may be different at different price ranges.Like demand curve,the supply curve is also perfectly elastic when it is a horizontal straight line and perfectly inelastic when it is a vertical straight line.In the figure, at portion AB,the supply is elastic and at portion BC,it is inelastic.
Figure also shows that the sellers do not at all below certain price such as OP.If price is OP,the sellers sell up to OQ1 quantity without high price.The price should be higher to sell more OQ1.Finally,the seller cannot and does not sell more than OQ2 however high the price may be.In the figure,at point B (where the supply curve is tangent to the line drawn from the point of origin),the elasticity supply is unity.When the supply curve is a straight line from the point of origin,the supply is unitary elastic throughout the length of the supply curve,whatever be the slope.

Long run supply curve

The long run supply is a long of time.In the long run even fixed factors can be changed.The firms can enter or leave the industry according to demand condition.If the demand is high,new firm enters the industry and if the demand is low,some firms leave the industry.
In the long run firm will be equilibrium when the MC curve cuts the minimum point of LR average cost curve.The run price will be equal to both marginal cost and minimum average cost.Hence,in the long run the firm produces and sells the indicated by the minimum point of LR average cost curve.
The LR supply curve of industry of LR marginal cost curves due to the following reasons :

1. In the long run only the particular point of LR marginal cost curve is the LR supply curve of a firm not all part of LR marginal cost curve .
2. In the long run,the number of firms change at different prices or demand conditions.
3. In the long run if the industry expands,internal economies and dis economies appear on account of which the LR supply curve of firms shift.Hence,the existing marginal cost cannot be summed up to derive the LR supply curve of industry.

The LR supply curve of a perfect competitive industry will have different shapes depending on whether the industry in facing increasing cost,or decreasing cost or constant cost.