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Gandhinagar institute of
technology
• Sub –Engineering Economics and Management
(2130004)
• Topic – Laws of Production
• Guided by – Prof. Prashant Pandya
• Group No - 7
• Sem – 3rd
• Branch – Electrical (b3)
• Academic year – 2015&2016
Prepared By
• Sodha Manthansinh(140120109057)
Law of Production
• Production of governed by mainly two types
of laws
(1)Law of variable proportions and
(2)Law of returns to scale
(1)Law of variable proportions
• Law of variable proportions deal with the concept
of increasing productivity using change in
production units within limits of existing fixed
cost. law of variable proportion is written as
follows:
• “ In a given state of technology, when the units of
variable factor of production are increased within
the units of other fixed factor, the marginal
productivity increases at increasing rate up to
certain point than after this it will decrease.”
law is based on following assumptions
• The technique of production remains same.
• This law is adopted for short run only.
• Labor and raw material are variable factors.
• Other inputs must be kept constant.
• All factors are not kept rigidly fixed proportions but the
law is based upon the possibility of varying proportions
such electricity consumption. So , this law is also called
the law of proportionality.
• Units produced during production are homogeneous in
amount and quality.
-5
0
5
10
15
20
1 2 3 4 5 6 7
MP
TP
AP
Unit of
worker
22
MP TP AP Stages
1 1 2 2 1
2 4 6 3 1
3 6 12 4 1
4 4 16 4 2
5 2 18 3.6 2
6 0 18 3 3
7 -2 16 2.28 3
Law of Returns to Scale
• Following are the three laws of returns to
scale
• (1)Law of increasing Returns
• (2)Law of Constant Returns
• (3)Law of Diminishing Returns
(1)Law of increasing Returns
• “In a given state of technology when the units
of variable factors are increased with the units
of fixed factors, the marginal productivity
increases, it is called law of increasing
returns.”
Law is based on following assumptions
• There is a scope of further improvement in the
technique of production.
• At least one factor(such as land available) of
production is assumed to be indivisible.
• Some factors(labor and capital) are assumed to
be divisible.
• There is no change in the prices of factors of
production.
• All units of variable factors are equally efficient.
Application of the law
• The law of increasing return operators in such
manufacturing industries where:
• Factors of production are combined and substituted up
to some extent.
• The principle of specialization is applicable in industrial
units. The marginal productivity increase due to
specialization.
• In industrial sector human factors are more involved
than natural factors. Due to this reason natural
obstacles are less effective.
• An industry is expanded by getting the internal and
external economies of large scale of production.
(2)Law of Constant Returns
• “ When the units of variable factors are
increased with the units of other fixed factors,
the marginal productivity remains constant. It
is called constant return.”
Law is based on following assumptions
• Some factors(labor and capital) Are assumed to
be variable.
• There is no increase in the price of raw material.
• There is no change in the price of factors of
production.
• The supply of various factors for an industry
should be perfectly elastic.
• All units variable factors of production are equally
efficient.
Application of the law
• This law is applicable in those sectors where
human and natural factors play their role, for
example, in industry making blankets, pure
natural wool is used while blankets are
prepared in the presence of human factors.
• Such factors where economies of human and
natural factors are presented which counter
balanced each other and productivity is
provided with constant.
• This law is more applicable in such sectors
where labor’s roe is greater than other factors
of production. the law of constant returns
operates by increasing the units of labor force.
(3)Law of Diminishing Returns
• “In a given state of technology when the units
of variable factors of production are increased
with the units of other fixed factor, the
marginal productivity decreases it is called law
of diminishing returns.”
Law is based on following assumptions
• Units of capital and labor are used as variable
factors.
• The prices of the factors do not change.
• All units of variable factors are equally efficient.
• There is no change in technique of production.
• Best combination of factors of production has
crossed the level of optimum point.
• There is no change in the fixed factor of
production.
Application of the law
• The natural factors have role than human
factors in agricultural sector and marginal
productivity decreases.
• The sector has very wide area and supervision
cannot be very effective.
• Scope of specialized machinery is limited.
• There are other limitations of nature e.g. rain,
climate changes etc.
• The fertility land also declines with time.
Law of production

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Law of production

  • 1. Gandhinagar institute of technology • Sub –Engineering Economics and Management (2130004) • Topic – Laws of Production • Guided by – Prof. Prashant Pandya • Group No - 7 • Sem – 3rd • Branch – Electrical (b3) • Academic year – 2015&2016
  • 2. Prepared By • Sodha Manthansinh(140120109057)
  • 3. Law of Production • Production of governed by mainly two types of laws (1)Law of variable proportions and (2)Law of returns to scale
  • 4. (1)Law of variable proportions • Law of variable proportions deal with the concept of increasing productivity using change in production units within limits of existing fixed cost. law of variable proportion is written as follows: • “ In a given state of technology, when the units of variable factor of production are increased within the units of other fixed factor, the marginal productivity increases at increasing rate up to certain point than after this it will decrease.”
  • 5. law is based on following assumptions • The technique of production remains same. • This law is adopted for short run only. • Labor and raw material are variable factors. • Other inputs must be kept constant. • All factors are not kept rigidly fixed proportions but the law is based upon the possibility of varying proportions such electricity consumption. So , this law is also called the law of proportionality. • Units produced during production are homogeneous in amount and quality.
  • 6. -5 0 5 10 15 20 1 2 3 4 5 6 7 MP TP AP Unit of worker 22 MP TP AP Stages 1 1 2 2 1 2 4 6 3 1 3 6 12 4 1 4 4 16 4 2 5 2 18 3.6 2 6 0 18 3 3 7 -2 16 2.28 3
  • 7. Law of Returns to Scale • Following are the three laws of returns to scale • (1)Law of increasing Returns • (2)Law of Constant Returns • (3)Law of Diminishing Returns
  • 8. (1)Law of increasing Returns • “In a given state of technology when the units of variable factors are increased with the units of fixed factors, the marginal productivity increases, it is called law of increasing returns.”
  • 9. Law is based on following assumptions • There is a scope of further improvement in the technique of production. • At least one factor(such as land available) of production is assumed to be indivisible. • Some factors(labor and capital) are assumed to be divisible. • There is no change in the prices of factors of production. • All units of variable factors are equally efficient.
  • 10. Application of the law • The law of increasing return operators in such manufacturing industries where: • Factors of production are combined and substituted up to some extent. • The principle of specialization is applicable in industrial units. The marginal productivity increase due to specialization. • In industrial sector human factors are more involved than natural factors. Due to this reason natural obstacles are less effective. • An industry is expanded by getting the internal and external economies of large scale of production.
  • 11. (2)Law of Constant Returns • “ When the units of variable factors are increased with the units of other fixed factors, the marginal productivity remains constant. It is called constant return.”
  • 12. Law is based on following assumptions • Some factors(labor and capital) Are assumed to be variable. • There is no increase in the price of raw material. • There is no change in the price of factors of production. • The supply of various factors for an industry should be perfectly elastic. • All units variable factors of production are equally efficient.
  • 13. Application of the law • This law is applicable in those sectors where human and natural factors play their role, for example, in industry making blankets, pure natural wool is used while blankets are prepared in the presence of human factors. • Such factors where economies of human and natural factors are presented which counter balanced each other and productivity is provided with constant.
  • 14. • This law is more applicable in such sectors where labor’s roe is greater than other factors of production. the law of constant returns operates by increasing the units of labor force.
  • 15. (3)Law of Diminishing Returns • “In a given state of technology when the units of variable factors of production are increased with the units of other fixed factor, the marginal productivity decreases it is called law of diminishing returns.”
  • 16. Law is based on following assumptions • Units of capital and labor are used as variable factors. • The prices of the factors do not change. • All units of variable factors are equally efficient. • There is no change in technique of production. • Best combination of factors of production has crossed the level of optimum point. • There is no change in the fixed factor of production.
  • 17. Application of the law • The natural factors have role than human factors in agricultural sector and marginal productivity decreases. • The sector has very wide area and supervision cannot be very effective. • Scope of specialized machinery is limited. • There are other limitations of nature e.g. rain, climate changes etc. • The fertility land also declines with time.