It states that when more and more units of the variable factors are combined with the fixed factor, the total product will initially increase at an increasing rate, followed by increment at a decreasing rate and ultimately, it starts to fall.
Lets understand this with the help of an example.
Imagine You have a milk plant and in order to operate that plant, you need labour. So, initially you hire 2 people to produce milk. With the help of this labour, let’s say, 500 litres of milk are produced every day. Now, the demand for milk increases and so, you need to increase the production of milk. You can do it by hiring 4 additional people to produce 1000 litres of milk a day. Further, if you want to increase the production, you may hire 2 more labour but you may notice that the production stays the same at 1000 L, despite hiring the additional labour. After this point, if you continue hiring more units of labour with the expectation of a rise in production, the results will be opposite since the total output will start to reduce from this point on, making it 900 litres a day. So, the following observations can be made,
- Here, the Milk plant is a fixed factor and it has some limited capacity of production for each day.
- Labour is a variable factor which is needed to operate the milk plant. Initially labour worked efficiently, causing a rise in the total output from increased labour. But on hiring more labour they did not work efficiently and started to utilise their time in leisure. Eventually, the output started declining.
| Unit of Milk Plant | Units of labour | Total product | Marginal product |
| 1 | 1 | 2 | 2 |
| 1 | 2 | 5 | 3 |
| 1 | 3 | 10 | 5 |
| 1 | 4 | 17 | 7 |
| 1 | 5 | 23 | 6 |
| 1 | 6 | 28 | 5 |
| 1 | 7 | 30 | 2 |
| 1 | 8 | 30 | 0 |
| 1 | 9 | 28 | -2 |
Assumptions of Law of Variable Proportions
- Ratio of factors in the production function can be changed.
- Units of variable factors are homogeneous.
- There is no change in Technology.
Reasons of Increasing return to factor
- Optimum utilisation of resources
- Increase in efficiency of the variable factor
- Better coordination among the factors
Reasons of Decreasing return to factor
- Poor coordination between the factors of production
- Unavailability of perfect substitutes for the factors of production.
- Obsolescence of factors of production