Extra Notes Unit 4

Explanation of the Law of Variable Proportions:
In order to understand the law of variable proportions we take the example of agriculture. Suppose land and labour are the only two factors
of production.
By keeping land as a fixed factor, the production of variable factor i.e., labour can be shown with the help of the following table:
From the table 1 it is clear that there are three stages of the law of variable proportion.
In the first stage average production increases as there are more and more doses of labour and capital employed with fixed factors (land).
We see that total product, average product, and marginal product increases but average product and marginal product increases up to 40
units. Later on, both start decreasing because proportion of workers to land was sufficient and land is not properly used. This is the end of
the first stage.
The second stage starts from where the first stage ends or where AP=MP. In this stage, average product and marginal product start falling.
We should note that marginal product falls at a faster rate than the average product. Here, total product increases at a diminishing rate. It
is also maximum at 70 units of labour where marginal product becomes zero while average product is never zero or negative.
The third stage begins where second stage ends. This starts from 8th unit. Here, marginal product is negative and total product falls but
average product is still positive. At this stage, any additional dose leads to positive nuisance because additional dose leads to negative
marginal product.
Graphically,
Law of Return to Scale in Production Functions
Changes in output when all factors change in the same proportion are referred to as the law of return to scale. This law applies only in the
long run when no factor is fixed, and all factors are increased in the same proportion to boost production.
There are three stages in all.
1. Increase in Returns on the scale
2. Constant Returns on the scale
3. Decrease in Returns on the scale
Increasing returns to scale
It describes a condition in which all of the factors of production are raised, resulting in a higher rate of output. For example, if inputs are
raised by 10%, the output will be increased by 20%.
Reasons: 1. Due to the economy of scale 2. Specialisation through better division of labour
Constant returns to scale
It describes a condition in which all of the factors of production are increased at the same time, resulting in a steady growth in output. For
example, if inputs are raised by 10%, the output is also increased by 10%.
Reason: As the firm’s production grows, it reaches a point where all of the economy’s resources have been fully utilised, and output equals
input.
Diminishing returns to scale
When all of the production factors are increased simultaneously, output grows at a slower rate. For example, if inputs are raised by 10%,
the output will be increased by 5%.
Reasons:
1. The major cause of diminishing returns to scale is large-scale economies, diseconomies of scale occur when a company has grown
to such a size that it is difficult to manage
2. Lack of coordination
Assumptions of Return to scale
The following are the returns to scale assumptions: Capital and labour are the only two variables of production used by the company. In a
fixed proportion, labour and capital are integrated. Factor prices do not fluctuate, and the State of technology remains the same.
Difference between Return to Scale (Law of Returns to Scale) And Return to a Factor (Law Of Variable Proportion)
1. Return to factor has only one variable while the rest of the factors remain constant, whereas return to scale has all of the variables
changing
2. In return for factor, the factor proportion changes as more and more variable factor units raise production
3. In return to scale, the factor proportion remains constant when factors are re-added in the same proportion to increase output
4. When you return to a factor, you get a negative return. Returning to scale has the effect of decreasing returns
5. Return to scale is a long-term phenomenon, whereas return to a factor is a one-time event
Hawtrey's Theory of Business Cycle

as applied to changes in the flow of money and the banking system, can be summarized in the following points:
1. Cash Reserve Expansion:
- Increased cash reserves in the banking system.
2. Credit Facility Boost:
- Expansion of credit facilities, leading to an increase in available loans.
3. Interest Rate Reduction:
- Decrease in interest rates on loans.
4. Business Borrowing Surge:
- Business organizations borrow more due to the attractive low-interest rates.
5. Stock Inventory Growth:
- Utilization of borrowed funds to increase stock inventory.
6. Rising Production Levels:
- Increased production of goods to meet growing demand from businesses.
7. Investment Uptick:
- Surge in investments across various sectors.
8. Factors of Production Expansion:
- Growth in land, labor, capital, and entrepreneurship.
9. Employment Rise:
- Increased employment opportunities.
10. Income Growth:
- Rise in personal and household incomes.
11. Improved Standard of Living:
- Enhanced living standards due to increased incomes.
12. Demand Escalation:
- Growing demand for goods and services.
13. Price Increase:
- Upward pressure on prices due to heightened demand.
14. Profit Expansion:
- Businesses experience increased profits.

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Explanation of the Law of Variable Proportions:

Hawtrey's Theory of Business Cycle

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