LAW OF VARIABLE PROPORTIONSIn short-period when the output of a production is sought to be increased by way of additional application of the variable factor to a given quantity of fixed factors, law of variable proportions comes into operation. The law of variable proportions is that law which predicts the consequences of varying the proportions in which the fixed and variable factors of production are used. When the number of one factor is increased while all other factors remain constant, then the proportion between the fixed and variable factors is altered. Supposing there are two factors of production i.e. Land and labour. Land is fixed factor and labour is a variable factor. Suppose you have a land measuring 2 hectares. You grow tomatoes on it with the help of a labourer. Accordingly the proportion between labour and land will be 1:2. If the number of labourers is increased to 2 then the new proportion between labour and land will be 2:2, in other words, if there were 2 hectares of land per labourer previously, now there will be 1 hectare of land per laborer. On account of change in the proportion of factors there will also be a change in total output at different rates. In Economics, this tendency is called Law of Variable Proportions. The law of variable proportions stats that as the proportion of factors is changed, the total production at first increases more than proportionately, then equal-proportionately and finally less than proportionately. The classical economists called it the Law of Diminishing Returns. They derived it by applying more and more labour to a fixed acreage of land, and thought of it as associated particularly with agriculture. But it is a general principle that can be applied to any production operation. It is now usually called the Law of Variable Proportions. It can also be called the Law of Diminishing Marginal product or Diminishing Marginal Returns or simply as Diminishing Returns. In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)Short example: Where all inputs increase by a factor of 2, new values for output should be:Twice the previous output given = a constant return to scale (CRTS)Less than twice the previous output given = a decreased return to scale (DRS)More than twice the previous output given = an increased return to scale (IRS)Assuming that the factor costs are constant, a firm experiencing CRTS will have constant average costs, a firm experiencing DRS will have increasing average costs and a firm experiencing IRS will have decreasing average costs.
It is a branch under economics, most commonly referred to as variable factor proportions, which states that it will reach a point where a further addition of a unit or a factor, would ultimately lead to a decreasing rate of return.
The demand curve facing the pure monopolist is ?