LAWS OF RETURN

by • 24/06/2011 • B.COM PART 1 EconomicsComments (0)836

There are three laws of returns known to economists:

  1. law of Increasing return
  2. Law of Diminishing return
  3. Law Of Constant Return

Law Of Increasing Return:

It is defined as:

“ Other things remain the same, if an increase of a variable factor (labor and capital) on fixed factor (land) output will increase. This tendency in production is known as law of increasing returns”.

Explanation Of Law By Schedule:

Variable Factor

Total Return (kg)

Marginal Return (kg)

1

100

100

2

220

120

3

360

140

4

520

160

5

700

180

6

860

160

In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. Marginal return is increasing from 1 labor to 5th labor. Marginal return curve shows increasing return because this curve is upward slopping from left to right.

Law Of Constant Return:

 

It is defined as:

“Other things remain the same, if an increase of variable factor on fixed factor, output will increase in the same proportion of every variable factor. Means Marginal Return will remain unchanged”.

Explanation Of Law By Schedule:

Variable Factor

Total Return (kg)

Marginal Return (kg)

1

100

100

2

220

100

3

360

100

4

520

100

5

700

100

6

860

100

In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. As the no. of labors is increased marginal return is increased but in the same proportionate, shows marginal return.

Law Of Diminishing Marginal Return

Marshall stated the law of diminishing marginal returns in the following words:

“ An increase in capital and labor applied in the cultivation of land causes in general less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the art of agriculture”.

Explanation Of Law By Schedule:

Variable Factor

Total Return (kg)

Marginal Return (kg)

1

200

200

2

380

180

3

540

160

4

680

140

5

800

120

From the above table we can find out that when the farmer applies first unit of capital and labor the production is 200 kg. And after that he applies 2nd, 3rd, 4th, and 5th unit similarly. The 2nd column of total return is showing increasing trend as 380, 540, 680, and 600 respectively.

While 3rd column of marginal return diminishing as the number of labor and capital increased. After applying 3rd unit marginal return is decreased again from 180kg to 160kg and so on.

In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. The downward sloping curve represent the law of diminishing marginal return.


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