MAHARASHTRA NATIONAL LAW UNIVERSITY

ECONOMICS PROJECT

LAW OF VARIABLE PROPORTION AND ITS APPLICATIONS ON

AGRICULTURAL ECONOMICS

SUBMITTED BY

KSHEMYA R NAIR

BA-LLB (Hons) SEMESTER III

ROLL NO 34

UNDER THE GUIDANCE OF

Mr. AKASH MANGESH SHAHAPURE

ASSISTANT PROFFESSOR (ECONOMICS)

OBJECTIVE

The following project deals with the application of the law of variable proportions and the
analysis of the law under the production function. The law of variable proportions shows how
the producers are supposed to rationally allocate their resources in order to efficiently
produce an output for the given amount of input. This is a project tries to specifically deal
with the application of the law of variable proportions in agricultural economics because it is
one of the major fields under economics where a producers rational decisions relating to
resource allocation for getting a substantial yield on a given piece of land can be analysed.
this project understands the various aspects of law of variable proportion, explains its three
stages of production and then goes about to analyse its practical application. Since agriculture
and the farming business involve large scale production and it is one of the major fields on
which any economy relies the law of variable proportion plays a critical role in influencing a
producer’s efficiency in this field. Therefore this project is focused on how law of variable
proportions is applicable in this field and how it helps the producers make a rational decision.
INTRODUCTION

Among the contributions that have been made in the recent years to the better understanding
of the fundamental principle of diminishing productivity those of J.F Knight and J.D. Black
are basic the this concept. Professor Knight in his book Risk, Uncertainty and Profit, brought
out more clearly the than had hitherto been done the logical implications f what we know in a
general way about the diminishing returns obtained from successive application of any
variable factor of production to others that are fixed and stressed particularly the symmetrical
character of the law. Professor Black along these lines has consistently emphasised on the
need for empirical research to give the law greater precision and practical usefulness.

It is important to recognise the outset that productivity depends on the following things.

1. Proportion of factors of production

2. Methods of production
 Dependent on the scale of production
 Dependent on the state of arts

Although it is true that with large scale operations a finer adjustment of the proportions of
factors of production is generally possible, a highly significant distinction is nevertheless to
be made between the basic principles involves under the two main heads of this
classification. As long ago as 1902 Professor C. J. Bullock pointed out that the principle of
increasing returns rests on a different basis from the principle of decreasing returns.
Decreasing returns arises from the scarcity of some factor of production and the consequent
necessity of using greater nd greater proportions of the others along with it. Increasing returns
on the other hand depends on the improvements in the organisation made possible by increase
in the scale of operations; division of labour; specialization of machinery; utilization of by-
products and so on. The reference to these as ‘economies of organisation’ however is not
entirely satisfactory because there are improvements in organisation which come about
through the natural progress of the arts and are not introduced as a result of n increase in the
scale of production.
LAW OF VARIABLE PROPORTION AND ITS THREE STAGES OF PRODUCTION

The law of diminishing returns describes the relationship between output and the variable
input when other inputs are held constant.

Definition: If increasing amounts of one input are added to a production process while all
other inputs are held constant, the amount of output added per unit of variable input will
eventually decrease. It is also known as law of diminishing productivity or the law of variable
proportions. Application of the law of diminishing returns to the production concept can
result in a production function of classical type. It displays increasing marginal returns first
and then decreasing marginal returns.

Three stages of production

The classical production function can be divided into three regions or stages, each being
important from the standpoint of efficient resources use.

Stage-I occurs when marginal physical product (MPP) > average physical product (APP).
APP is increasing throughout this stage, indicating that the average rate at which X is
transformed into Y, increases until APP reaches its maximum at the end of Stage-I.

Stage-II occurs when MPP is decreasing and is less than APP but greater than zero. The
physical efficiency of the variable input reaches a peak at the beginning of Stage–II. On the
other hand physical efficiency of fixed input is greatest at the end of Stage-II. This is because
the number of fixed input is constant and therefore the output/ unit of fixed input must be the
largest when the total output from the production process is maximum.

Stage-III occurs when MPP is negative. Stage III occurs when excessive quantities of
variable input are combined with the fixed input, so much, that total physical product (TPP)
begins to decrease.
The law of variable proportions or diminishing returns holds good under the following
conditions:
(1) The State of Technology is given:
The state of technology is assumed to be given. If there is improvement in technology
(inventions, streamlining of management) then MP and P may rise and the law may not work.

(2) There is only one Variable input:

One and only one resource is variable. It goes on increasing unit by unit.

(3) Other input must be Kept Constant:

There must be some inputs whose quantity is kept constant. It is only in this way that we can
very the factor proportions and knows its effects on output. This law does not apply in case
all factors are proportionately yarned. Beheaviour of output as a result of the variations in all
inputs gives birth to “Returns to scale.”

(4) Variations in Proportions:

The law is based upon the possibility of varying the proportions in which the various factors
can be combined. It does not apply to those cases where the factors must be used in fixed
proportions. When the various factors are used in fixed proportions then the increase in one
factor would not lead to any increase in output i.e., the MP will be zero.
(5) There is Short Period:
Short period has been assumed. In the long period all factors are variable and there are
returns to scale and not the law of variable proportions.

Economic recommendations & production function analysis:

Production function knowledge and the input and output prices information can be used to
know the most profitable input and output levels. However, even when price information is
not available, some recommendations about the input use can be made from the production
function itself.

1. If the product has any value at all, input use once begun, should be continued until Stage –
II is reached. That is because physical efficiency of variable resources, measured by APP,
increases throughout stage –I.

2. Even if input is free, it will not be used in stage III. Maximum output occurs when Stage II
closes. It is of no use applying variable input when TPP starts coming down.

3. Stage II defines the area of economic relevance. Variable input use must be somewhere in
stage-II, but exact input amount can be determined when choice indicators (input & output
prices) are known.

A. Relationship between TPP & MPP

1. Since MPP is a measure of rate of change, therefore

(i) when TPP is increasing, MPP will be +ve,

(ii) when TPP is constant MPP will be zero,

(iii) when TPP decreases, MPP will be –ve.

2. So long MPP moves upward, TPP increases at an increasing rate.

3. When MPP remains constant, TPP increases at a constant rate.

4. When MPP starts declining, TPP increases at a decreasing rate.

5. When MPP is zero, TPP will be at maximum.

B. Relationship between MPP & APP

1. When MPP is increasing, APP is also increasing. So long as MPP is above APP, the APP
keeps increasing.

2. When MPP curve goes below APP curve, APP starts declining, that is, when AP is
decreasing the MP is always less than APP.

3. When MP = AP, AP will be at maximum. Here MP curve must intersect AP curve from
above at its highest point.

Elasticity of production:

The elasticity of production is a concept that measures the degree of responsiveness between
output and input. It is independent of the units of measurement.
PRACTICAL APLICATION OF THE LAW OF VARABLE PROPORTIONS

Agricultural Economics

As a separate discipline, agricultural economics started only in the beginning of 20th century
when economic issues pertaining to agriculture aroused interest at several educational
centres. The depression of 1890s that wrecked havoc in agriculture at many places forced
organized farmers groups to take keen interest in farm management problems. The study and
teaching of agricultural economics was started at Harvard University (USA) in 1903 by
Professor Thomas Nixon Carver. Agricultural economics may be defined as the application
of principles and methods of economics to study the problems of agriculture to get maximum
output and profits from the use of resources that are limited for the well being of the society
in general and farming industry in particular.

Nature and Scope of Agricultural Economics

Agriculture sector has undergone a sea change over time from being subsistence in nature in
early stages to the present day online high-tech agribusiness. It is no more confined to
production at the farm level. The storage, processing and distribution of agricultural products
involve an array of agribusiness industries. Initially, agricultural economics studied the cost
and returns for farm enterprises and emphasized the study of management problems on farms.
But now it encompasses a host of activities related to farm management, agricultural
marketing, agricultural finance and accounting, agricultural trade and laws, contract farming,
etc. Both microeconomics and macroeconomics have applications in agriculture. The
production problems on individual farms are important. But agriculture is not independent of
other sectors of the economy. The logic of economics is at the core of agricultural economics
but it is not the whole of agricultural economics. To effectively apply economic principles to
agriculture, the economist must understand the biological nature of agricultural production.
Thus, agricultural economics involves the unique blend of abstract logic of economics with
the practical management problems of modern day agriculture. The widely accepted goal of
agricultural economics is to increase efficiency in agriculture. This means to produce the
needed food, fodder, fuel and fibre without wasting resources. To meet this goal, the required
output must be produced with the smallest amount of scarce resources, or maximum possible
output must be obtained from a given amount of resources.
Definition: Production economics is the application of the principles of microeconomics in
production. Based on the theory of firm, these principles explain various cost concepts,
output response to inputs and the use of inputs/resources to maximize profits and/ or
minimize costs. Production economics, thus provides a framework for decision making at the
level of a firm for increasing efficiency and profits.

Why study production process

The study of production economics is important in answering the following questions:

1. What is efficient production?

2. How is most profitable amount of inputs determined?

3. How the production will respond to a change in the price of output?

4. What enterprise combinations will maximize profits?

5. What should a manager do when he is uncertain about yield response?

6. How will technical change affect output?

Agricultural Production Economics

It is a sub-discipline within the broad subject of agricultural economics and is concerned

with the selection of production patterns and resource use efficiency so as to optimize the
objective function of farming community or the nation within a framework of limited
resources. It may be defined as an applied field of science wherein principles of economic
choice are applied to the use of resources of land, labour, capital and management in the
farming industry
ILLUSTRATION ON HOW THE LAW OF VARIABLE PROPORTION AFFECTS
THE FARMING BUSINESS

It is a law of fundamental importance in agriculture. This law describes the relationship

between output and a variable input when other inputs are held constant. The law can be
stated as follows: "If increasing amounts of one input are added to a production process while
all other inputs are held constant, the amount of output added per unit of variable input will
eventually start decreasing." It states that if the quantity of one factor is increased with
quantities of other factors held constant, the marginal increment to the total product may
increase or remain constant at first but will eventually decrease after a certain point. The
operation of this law can be, however, delayed by improvements in technology and /or
improvement in managerial ability. Ultimately this law must operate in the practical world.
The level to which yields per acre , milk per cow or weight per poultry bird should be pushed
are the kind of questions which involve the law of diminishing returns. It is, thus, an
important point in farming to decide the level to which a farmer should push his output per
acre or per cow, etc. to secure the maximum possible profit. This principle of returns is also
important in specifying how large a farm should be or how much labour and/or machinery be
added. In this context resources can be classified as variable resources and fixed resources.
For example, an acre would be a fixed resource with the farmer, but fertilizer would be a
variable resource. As addition quantities of fertilizer are given to an acre of crop, the return to
each additional dose will eventually become lesser and lesser. When diminishing returns hold
true, it is seldom profitable to produce a maximum yield per acre or milk or meat per animal,
although exceptions might exist.

It can be said that the quantity of a variable resource applied to a fixed acre of land or given
head(s) of livestock adds less and less to the yield or output. Examples are application of
seeds, fertilizers, irrigation , etc. which have a characteristic of diminishing marginal
productivity.

There are some farmers who lose sight of diminishing returns to variable factor-use and
consider the highest yield per acre, the highest milk yield per cow etc. always to be the best
level in terms of profit. This way they think only in terms of physical yields and not in terms
of costs and profit. True, many farmers would need to raise their production levels in order to
increase their profits, but they must consider cost also at some point. One can easily decide
the level of resource use or level of production by using the following profit rule under the
conditions of diminishing returns. Keep adding variable resource(s) to the fixed resource(s)
as long as the added return is more than the added cost. As an example, a farmer might want
to know how much fertilizer should be added to one acre of paddy to maximize his profits,
the price of paddy being Rs.50/- per quintal and price of fertilizer Rs.30/- per unit and
physical input-output data on paddy yield response to fertilizer given as in table

TABLE

Marginal Cost and Marginal Returns Analysis of Paddy Yield Response

to Application of Fertilizers

Fertilizer Yield of Total Cost Marginal Marginal Marginal Total Profit

Units per Paddy (Qtls) @ Cost Product Returns Returns (Rs.)
Acre (50 kgs (Rs.30 Per (Rs.) (Qtls) (Rs.) (Rs.)
CAN) Unit)
(T.P.) (T.C.) (M.C.) (M.P.) (M.R.) (T.R.)
0 2 0 0 0 0 100 100
1 6 30 30 4 200 300 270
2 9 60 30 3 150 450 390
3 10.5 90 30 1.5 75 525 435
4 11.5 120 30 1.0 50 575 455
5 12.0 150 30 0.5 25 600 450
6 11.5 180 30 -0.5 -25 575 395
7 10.5 210 30 -0.1 -50 525 315
Analysis begins with comparing marginal or added costs and added returns. One should stop
applying additional doses of fertilizer where the fertilizer cost is just balanced by the added
returns.

As shown in table the optimum level of fertilizer to be used in this case is 4 units. Beyond
this level the marginal return is less than the marginal cost. If we calculate total profit at each
unit of fertilizer, as given in last column, we observe that the net returns/profits per acre are
the highest (Rs.455) at four units of fertilizer use. One may not go up to the last profitable
unit because apart from the cost of the input (fertilizer units) there may be some indirect costs
such as costs of spreading of the fertilizer and extra cost on bigger harvest etc. In practice,
therefore, even an economic farmer would apply fertilizer a little below this break-even point.
Such simple exercises for taking day to day operational farm decisions can save the farmer
from many losses and increase his net returns from the farm business. This principle, should
be , therefore, helpful in making decisions such as:

i. The level to which yield per acre, milk per cow, etc. should be pushed to secure
maximum profit.

ii. The size of the farm one should operate with given resources of capital, labour and
management.

iii. The amount of fertilizer, labour or type of machinery one should use.

a. Constant returns: It means each marginal unit of a variable resource adds the same

amount of the output to the total production. Though ‘diminishing marginal productivity’ is
the rule, constant productivity is frequently observed when no resource is fixed and all are
increased together in the same proportion. For example, another acre may be as productive as
the first with same inputs. If one acre of wheat requires 20 man-hours of labour, 30 kgs. Of
seed and 13 inches of irrigation water and yields 10 quintals of wheat, the second acre will
require additional 20 man-hours of labour, 30 kgs. Of seed and 13 inches of irrigation water
and will also yield 10 quintals of wheat. The second acre is just as productive. The marginal
or added production from each increase in resource input is the same: this is a case of
constant productivity.

Another case is when one or more resources are fixed but have excess capacity. For example,
family labour or a farmer may not be fully employed. A storage godown may have surplus
capacity. A tractor may be big enough to control 50 acres holding but the farmer may have
only 27 acres. If variable input is added to such a resource-mix situation, constant returns
may result.

Under constant productivity, each unit input increase is just as profitable as another. Under
such conditions the profit rule is: If production is profitable on first unit, keep producing till
the constant returns hold. Do not produce at all, if production is not profitable on first unit. In
a sense, follow the same principle i.e. continue adding the variable resource to the fixed
resource(s) as long as the return is greater than the added costs.
Limits on constant returns are reached as some of the factors become fixed. If nothing else
becomes fixed, management becomes a fixed resource. The productivity of one resource,
depends on the amount of the other(s) with which it is used. For example, if capital is fixed at
a low level for the farm as a whole , labour productivity will be lower. Since the productivity
of one resource depends on the amount of other resource(s) with which it is combined,
farmers having different quantities of land , capital , labour and management will have
different programmes. What is best for one farm is, therefore, seldom best for the other(s).
Each farmer must get the right balance of resources and a unique optimum farm organization
consistent with the resources he has.

(c) Increasing returns: There are few cases in farming business where increasing
productivity may be found. Increasing productivity means added resources give increasing
returns. This relationship may hold only over a very limited range of production and is
applicable when all resources are increased together and not when some resources are fixed.
For example, a cattle shed constructed for 30 cows may cost more per cow than if one is
constructed for 60 cows, the cost involved in the latter case may not be double because of
some economies on account of joint walls etc., but the gross returns per cow might be the
same. Use of added resource(s) thus, will give increasing returns in such case. In this case
each additional unit gives higher and higher returns. So long as this relationship holds,
production should keep expanding.
CONCLUSION

Law of Variable Proportions examines the production function with one factor variable,
keeping the other factors fixed. It refers to the input-output relation when the output is
increased by changing the quantity of one input. When the quantity of one factor is varied,
keeping the quantity of the other factors fixed the proportions between the variable factor and
the fixed factor is changed.

Production in the short run is subject to the Law of Variable Proportions because some inputs
are fixed in the short period and production can be changed only by changing the amount
(proportion) of those inputs that are variable. It states that as we go on increasing the amount
of one factor, keeping amounts of the other factors of production constant, the return to the
successive units of the variable factor are non-proportional: the return may rise at first, may
be constant for a short while but must eventually diminishing. Therefore, this law is also
identified as the law of returns as the Law Diminish Productivity, and as the Law of Non-
proportional Returns.

“As equal increments of one input are added, the inputs of other productive services being
held constant, beyond a certain point the resulting increments of product will decrease, i.e.,
the marginal products will diminish.” (Stigler) “As the proportion of one factor in a
combination of factors is increased, after a point, first the marginal and the average product
of that factor will diminish.” (Benham)
BIBLIOGRAPHY

BOOKS

1. INTRODUCTION TO MICRO ECONOMICS BY RADHA BAHUGUNA

WEBSITES

 www.harvardlectures.edu
 www.economics discussions.net
 www.agrinet.com