Question

The following is known about a firm: 

Units of labour input	1	2	3	4	5	6
Total Output (Units)	50	110	150	180	180	150

State and briefly explain the law underlying changes in output as the input is changed. Also identify the various stages in the change in total product.

Answer 1

We will apply the Law of  Variable Proportions, and calculate:

Marginal Product (MP) = Change in Total Product

Average Product (AP) = Total Product/Units of Labour

Labour (L)	Total Product (TP)	Marginal Product (MP)	Average Product (AP)
1	50	50	50
2	110	60	55
3	150	40	50
4	180	30	45
5	180	0	36
6	150	−30	25

This law says that when more units of a variable factor (like labour) are added to fixed factors (like capital or land), the total product first rises, then falls, and eventually rises again.

Identification of Stages:

1. Stage I – Increasing Returns to a Factor
   • Labour: 1 to 2
   • MP increases from 50 to 60
   • AP also increases
   • Reason: Better utilization of fixed inputs
2. Stage II – Diminishing Returns to a Factor
   • Labour: 3 to 5
   • MP is falling but still positive
   • TP increases at a decreasing rate
   • Most efficient and profitable stage
3. Stage III – Negative Returns to a Factor
   • Labour: 6
   • MP becomes negative (−30)
   • TP falls
   • Reason: Overcrowding or too many workers reduce efficiency