Law of Variable Proportions – Three Stages of Production

This law explains how output changes when one factor is varied while other factors are kept fixed in the short run.

1. Statement of the Law

As units of a variable factor are added to a fixed factor, total product first increases at an increasing rate, then at a diminishing rate and finally starts decreasing, assuming technology remains constant.

This gives rise to three stages of production.

2. Assumptions

• Technology remains constant.
• Only one factor is variable (e.g., labour); others (land, capital) are fixed.
• All units of variable factor are homogeneous.
• Applicable in short run only.

3. Numerical Example (TP, AP, MP)

Use the earlier TP, AP, MP table. The same data can be used to explain three stages.

4. Three Stages of Production

Stage I – Increasing Returns to a Factor

• TP increases at increasing rate.
• MP rises; AP rises.
• Occurs from 0 to point where AP is maximum.

Reason: Better utilisation of fixed factor; division of labour, specialisation.

Stage II – Diminishing Returns to a Factor

• TP increases at diminishing rate.
• MP falls but is positive.
• AP falls.
• Occurs between point where AP is maximum and point where MP becomes zero.

This is the rational stage of production where firm normally operates.

Stage III – Negative Returns to a Factor

• TP falls.
• MP becomes negative.
• AP continues to fall.

Reason: Too much of variable factor compared to fixed factor → overcrowding, inefficiency.

Loading diagram…

5. Importance for the Firm

• Firm should not operate in Stage I (under-utilisation of fixed factor).
• Firm should not operate in Stage III (inefficiency, negative returns).
• Firm should operate in Stage II where MP is positive but falling – most economical stage.

6. Quick Revision Points

• Applies to short run where one factor is variable.
• Three stages: increasing, diminishing, negative returns.
• Stage II (diminishing returns) is rational region of production.

7. Quiz Time 🎯

Loading quiz…