Law of constant returns
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1. The law of constant returns states that when variable inputs like labor and capital are increased in fixed proportions to other factors, total output will increase proportionately. 2. It assumes some factors are variable while others are fixed, and that prices and supply of factors do not change. 3. The law is applicable in industries where human and natural factors work together at a constant rate of productivity, like blanket making using pure wool and human labor.
Law of constant returns
- 1. Law of Constant Returns LECTURE BY SHAKEEL AHMED QURESHI
- 2. LAW OF CONSTANT RETURN Definition With the addition of successive units of variable inputs to fixed amount of other factors, there is a proportionate increase in total output. In other words, when the units of variable factors are increased with the units of other fixed factors, the marginal productivity remains constant. It is called constant return. Assumptions This law is based on the following assumptions: 1. Some factors (labor and capital) are assumed to be variable. 2. There is no increase in the price of raw materials. 3. There is no change in the price of factors of production. 4. The supply of various factors for an industry should be perfectly elastic. 5. All units of variable factors of production are equally efficient.
- 3. LAW OF CONSTANT RETURN Fixed Factor (Land) Units of variable factor (labor, capital) Marginal product (MP) Total product (TP) 10 units 1 8 8 10 units 2 8 16 10 units 3 8 24 10 units 4 8 32
- 4. LAW OF CONSTANT RETURN (LAW OF CONSTANT COST) Fixed Factor (Land) variable factor (labor, capital) Marginal product (MP) Total product (TP) Wage Marginal Cost (MC) 10 units 1 8 8 200 200/8 = 25 10 units 2 8 16 200 200/8 = 25 10 units 3 8 24 200 200/8 = 25 10 units 4 8 32 200 200/8 = 25 10 units 5 8 40 200 200/8 = 25
- 5. LAW OF CONSTANT RETURN (LAW OF CONSTANT COST) Application of the Law For the application of this law, the following points are very important: 1. This law is applicable in those sectors where human and natural factors play their role, for example, in industry making blankets, pure natural wool is used while blankets are prepared in the presence of human factors. 2. Such factors where economies of human and natural factors are presented which counter balanced each other and productivity is provided with constant rate. 3. This law is more applicable in such sectors where labor's role is greater than other factors of production. The law of constant returns operates by increasing the units of labor force.