The Law of increasing returns

(Version of classical and neo classical economists)

The law of increasing returns is also called the law of diminishing costs. law of increasing return states that when more and more,units,of a variable factor is employed, while other factor remain fixed, there is an increase of production at a higher rate. The tendency of the marginal return to rise per unit of variable factors employed in fixed amounts of other factors by a firm is called the law of increasing return. An increase of variable factor, holding constant the quantity of other factors, leads generally to improved organization. The output increases at a rate higher than the rate of increase in the employment of variable factor.

The increase in output faster than inputs cont(nues so long as there is not deficiency of an essential factor in the process of production. As soon as there occurs shortage or a wrong or defective combination in productive process, the marginat product begins to decline. The law of diminishing return ‘begins to operate. We can, therefore, say that there are no separate laws applicable to agriculture and to industries. It is only the law of variable proportions which applies to all the different industries. However, the duration of stages in each productive undertaking will vary. They will depend upon the availability of resources, their combination in right proportions, etc., etc.

Application of the Law of Increasing Returns in Industries: There are certain manufacturing industries where the factors of production can be combined and substituted upto a certain limit, it is the law of increasing returns which operates. In the words of Prof. Chapman: “The expansion of an indUstry in which there is no dearth of necessary agents of production tends to be accompanied, other things being equal, by increasing returns”. The increasing returns mainly arises from the fact that large scale production is able to secure certain economies of production, both internal and external. When an industry is expanded, it reaps advantages of division of labour, specialized machinery, commercial advantages, buying and selling wholesale, economies in overhead expenses, utilization of by-products, use of extensive publicity and advertisement, availability of cheap credit, etc., etc.

The law of increasing returns also operates so long as a factor consists of large indivisible units and -the plant is producing below its capacity. In that case, every

additional investment will result in the increase of marginal productivity and so in lowering the cost of production of the commodity produced. The increase in the marginal productivity continues till the plant begins to produce to its full capacity.

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