The Law of Variable Proportions or Returns

The Law of Variable - etc The chief cause however is the degree of utilization of fixed inputs These lumpy fixed inputs possess optimum capacity of

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The Law of Variable Proportions or Returns: In the act of production, with constant units of fixed inputs, but progressively increasing units of variable inputs, the output will increase but not in the same proportion. Initially it will increase at an increasing rate (IMR), then at a constant rate (CMR) and finally, at a continuously diminishing rate (DMR). There are various causes responsible for the variable behavior of output. These include internal and external economies and varying utilization of the capacity of fixed factors. For a single firm, in the short run, external economies are not important. Such a firm may enjoy internal economies in the form of more efficient use of machines and managerial skills, better supervision, avoidance of wastage
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Unformatted text preview: etc. The chief cause, however, is the degree of utilization of fixed inputs. These lumpy fixed inputs possess optimum capacity of production. For instance, a printing press may turn out 5000 pages of books per day or a manager may supervise 800 workers. So long as this capacity is under utilized the output will increase at an increasing rate. Once the capacity is fully or optimally utilized the output will increase at a constant rate. When the capacity is utilized beyond optimum level output starts increasing at a diminishing rate. Thus the three phases of the production function are closely associated with under utilization , optimum utilization and over utilization of the fixed factors of production....
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This note was uploaded on 11/26/2011 for the course ECON MICRO ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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