Possibility of Operation of Production

Possibility of operation

            The law of variable proportions guides us about the possibility of operation. A rational producer will never choose first and third stage for its production he will always operate in the second stage, i.e. the stage of diminishing returns. The producer will not produce in the first and the third stages because in the first stage the fixed factor of production i.e. capital is underutilized and its marginal return is negative and in third stage the variable factor of production i.e. labor is over utilized and thus its marginal return becomes negative. In other words, the marginal return of fixed factor and variable factor is negative in first stage and third stage respective. It is the second stage where the return on both the fixed factors and variables though diminishing is positive. The producer will always produce in second stage. 

Returns to Scale Meaning

            In the run all factors are variable, hence the expansion of output may be achieved by varying all factor-inputs. When we change all factor-inputs in the same proportion, the scale of production is also changed. The study of the effect of change in the scale of production on the amount of output comes under the head of returns to scale.

            Thus, the term returns to scale refers to the changes in output as all factor-inputs change by the same proportion in the long run.

            Or, in other words, the law expressing the relations between varying scales of production and quantities of output is called returns to scale. In short, returns to scale refer to the effects of scale relationship.

Three Types

            Now the question is at what rate the output will increase when all factor- inputs are varied in the same proportion. There can be three possibilities in this regard. The increase in output may be more than, equal to, or less than proportional to the increase in factor-inputs. Accordingly, returns to scale are also of three types-increasing returns to scale, constant returns to scale and diminishing returns to scale.

S.N.	Returns to a Variable Factor	Returns to Scale
1	Operates in the short run	Operates in the long run.
2	Only the Quantities of factor are varied	All factor-inputs are varied in the same proportion
3	Changes in the factor-ratio.	No change in the factor-ratio
4	No change in the scale of production	Changes in the scale of production.