Laws of Returns

1st year POE - Principles of Economics Notes

 

Laws of Returns



* Law of Diminishing Returns



* Law of Increasing Returns



* Law of Constant Returns



* Why does Law of Diminishing Returns apply to Agriculture?



* Does it apply only to Agriculture?

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Law of Increasing Returns



Introduction



In order to increase the production, a producer has to increase the
proportion of its fraction of production. However, the returns due to
variations in the factors are not fixed. In some cases, return due to
each successive unit is increased. This tendency is known as Law of
Increasing Returns.

Explanation



This law is mostly found to be operating in manufacturing industries.
This law was first propounded by Prof. Marshall, in his words, the law
states that:



“An increase of labour and capital leads generally to improved
organization, which increases the efficiency of the work of labour and
capital.”



According to this law whenever a new dose of labour and capital is
applied it yields increasing returns. Also the cost of production
diminishes.

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Law of Diminishing Returns



Introduction



In some cases the return due to each successive additional unit, the
production goes on diminishing. It is known as Diminishing Returns and
is further explained by the Law of Diminishing Returns.

Explanation



This law is one of the most fundamental law of Economics. Usually it is
related with agriculture and was also first enumerated by a Scottish
Farmer.



Usually an increase in any of the factor of production results in an
increase in production but this change is a proportionate change. It
means that if the quantity of land and labour is doubled, although there
will be an increase in the production but it will not be doubled. And
that is what Law of Diminishing Returns states. In the words of
Marshall:



“An increase in the capital and labour applies in the cultivation of
land causes in general a less than propotionate change or increase in
the amount of production raised. Unless it happens to coincide with an
improvement in the art of agriculture.

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Law of Constant Returns



Introduction



Similarly, in some of the cases, the increase in the productive unit
keeps the production constant. This tendency is known as law of Constant
Returns.

Explanation



When an increase or decrease in the output of an industry makes not
alteration in the cost of production per unit, the law of constant
returns is said to operate. In other words when fresh doses of
productive resources results in an equal return, it is called constant
returns.



The law of constant returns operates in those industries where the cost
of raw material and manufacturing cost are half and half. In other words
the law operates where man and nature dominate equally. It is also said
that a point where the opposite tendencies of diminishing returns and
increasing returns are in equilibrium is the Constant Returns.

Examples



Possible examples of industries where the law applies are cane growing
and sugar making, Iron-ore mining and steel making, cane growing and
iron ore are subject to law of diminishing turns whereas sugar making
and steel making to law of increasing turns. In these industries the
advantage of increasing returns are neutralized by increasing cost of
raw materials.

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Why does Law of Diminishing Returns apply to Agriculture?



The law of diminishing returns specially applies to agriculture and
other extractive industries. One thing that is common to all these
industries is the supremacy of nature. It is therefore often remarked
that the part that nature plays in production corresponds to diminishing
returns and the part which man plays confirms to the law of increasing
returns. The reason is that, nature where it is supreme is subject to
diminishing returns, while industry where man is supreme, is subject to
increasing return. Besides the supremacy of nature, there are several
other reasons why agriculture is subject to the law of diminishing
returns.The agricultural operations are spread out over a wide area, and
supervision cannot be very effective. Scope for the use of specialized
machinery is also very limited. Therefore economics of large scale
production cannot be reaped

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Does it apply only to Agriculture?





It is wrong to say that the law only applies to agriculture as
agriculture is always subject to diminishing and manufacturing to
increasing returns. The application of the law is universal. It applies
to industries also. If the industry is expanded too much and becomes
unwisely supervision will become tax and the cost will go up. The law of
diminishing returns thus sets in. The only difference is that in
agriculture it sets in earlier and in industry much later.

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