Question

Discuss the three stages of the law of variable proportions with the help of diagrams. In which stage will a rational producer like to operate?

Answer 1

The three stages of the law of variable proportions are as follows:

Stage I - Increasing Returns:

• TP - It initially increases at an increasing rate and subsequently at a diminishing rate after F.
• MP - It increases first, reaches the maximum, and then starts decreasing.
• AP - It increases throughout the stage and reaches the maximum AP < MP.

Stage II - Diminishing Returns:

• TP - It continues to increase at a diminishing rate and eventually reaches the maximum.
• MP - It continues to decrease and eventually becomes zero when TP reaches maximum.
• AP - From the maximum, it begins to decrease AP > MP.

Stage III - Negative Returns:

• TP - It diminishes.
• MP - It becomes negative.
• AP - It continues to decrease but is always positive.

It can be explained with the help of the diagram:

A smart maker won’t pick to make at stage III, where the MP is negative. For some reason, this stage is also known as the stage of economic nonsense. He also won’t pick stage I because the variable factor’s AP increases all the way through that stage. That is, if the producer stops working before stage I ends, he is not making the most of the variable factor’s rising production. Because of this, a sensible director would want to work in stage II.