Page 4 - Lesson notes-Production Function(38)

(a) In this stage the total product declines in absolute terms.
(b) The marginal product becomes negative.
The firm cannot operate in the third stage where MP is negative and TP starts declining
as we are moving beyond the optimum degree of specialisation.
5. There are 3 important reasons or causes for the operation of increasing
returns—
(a) Proper utilization of the fixed factor
(i) In the initial stage of production the units of variable input i.e., labour) is so less that
fixed inputs cannot be effectively utilized.
(ii) Proper utilization of the fixed factor can be attained when more and more units of
variable factor (labour units) are applied to the fixed factor (land), the fixed factor will be
used intensively and output will increase rapidly.
(b) Indivisibility of fixed factor
(i) Indivisibility of fixed factor means that due to technological requirements a minimum
amount of fixed factor must be employed, whatever the level of output,
i.e., fixed factor cannot be divided into smaller units.
(ii) Thus, as more units of variable factors are employed with an indivisible fixed factor,
output increases due to fuller and more effective utilization of the fixed factor.
(c) Specialization and division of labour
(i) Initially there was only one labour working on all the 5 acres of land ploughing,
watering, etc.
(ii) As the number of labour units increases, each worker specialized in a particular
activity leads to specialization of the variable units and this resulted in increased output.
6. Reasons for diminishing returns:
(a) The non-optima! combination of variable factor with the fixed factor
(i) When a given quantity of a fixed factor is combined with more and more units of
variable factor, the additional units of variable factor will have smaller and smaller
quantity of fixed factor to work with them.
(ii) As many workers share the same fixed factor, the share of each would obviously fall.
Therefore, the cooperation of the fixed factor is not available to the same extent. Thus,
an increase in the variable factor would add less and less to total output.
(b) Imperfect Substitutes
(i) Diminishing return to factor occurs because variable factor and fixed factor are
imperfect substitutes to each other.
(ii) Technically speaking, there is a limit to which variable factor can be applied to fixed
factor and that limit depends upon the efficiency of fixed factor. So, variable factor and
fixed factor are imperfect substitutes to each other.
7. Reasons for Negative returns:
(a) Scarcity of Fixed Factor
(i) During a short period, there is a limitation that we cannot change the fixed factor.
(ii) So, variable factor can be change upto a certain limit and that limit depends upon the
efficiency of fixed factor. If we cross that limit, the total product starts falling.
(b) Efficiency of Variable Factor Fall
(i) In this stage the amount of variable factor becomes excessive relative to the fixed
factor. This happens when too many LABOUR are engaged in cultivating on a given
piece of land.