What is Law of Increasing Returns
The law of Increasing Returns is also known as the Law of Diminishing Costs. According to this law when more and more units of variable factors are employed while other factors are kept constant, there will be an increase of production at a higher rate. This law is applicable to all different industries and partially applicable in agricultural sector.
Statement of the Law
“The tendency of the marginal return to rise per unit of variable factors employed In fixed amounts of other factors by a firm Is called the law of increasing return”.
Assumptions of the Law
- There is always a scope of improvement in technology and techniques of production.
- At least one factor of production is assumed to be indivisible.
- Some factors are assumed divisible.
Explanation of Law
The law can be explained with the help of the following schedule and diagram: Schedule:
The schedule shows that the quantity of capital remains the same i.e. 2 machines throughout the production process but the number of laborers is increased from time to time. The first laborer has produced a total production (TP) of 10 meters of cloth. After applying the 2nd laborer total production is increased to 22 meters. The marginal production (MP) of the second laborer is 12, which goes on increasing. After the use of the 3rd, 4th and then the 5th laborer the total production is increased from 36 to 70 meters and the M.P from 14 to 18 meters.
In the diagram the quantity of labour is measured along X-axis while the marginal production (MP) and total production (TP) are measured along Y-axis. The Marginal Production Curve is represented by MK, which is sloping up-ward showing an increase in the TP after the use of additional amount of labour. With the use of additional amount of labour, from left to the right on X-axis, MP is increased which is shown on Y-axis.
The law of increasing returns is more applicable in industrial sector than agricultural sector. But it is not applicable for a long period of time because after a certain time period its application comes to an end, and this stage is known as the optimum stage.