The Law of Variable Proportion

The law of variable proportion states that if the number of one variable in the production of a product is increased, the output will initially increase but slowly deteriorate over time. This is also known as the law of diminishing returns.

Assumptions

The following assumptions are made by the law of variable proportions: only one factor is a variable, and the others are held constant; all parts of the variable are equally efficient; the production method is not altered; and factors of production can be used in different proportions.

Three Stages

The first stage after increasing the variable shows the increase of total output at an increasing rate until a certain point. The time it takes to reach this point is proportional to the increase applied to the variable. Stage two shows a continued increase in output, but at a declining rate. At a certain point, the total output peaks and begins to decline, eventually nearing zero. This is stage three.

Example

Suppose you have two hectares of land and the equipment required to farm tomatoes. You also have a single laborer. If the number of laborers is increased to two while everything else remains the same, this will shrink the amount of land each laborer has to work to a single hectare each. Initially, the output will double; however, the law of variable proportions states that over time, this increase in output will decline and eventually stop, at which point the total output will decrease.

References

• "Business Economics"; T.R. Jain, O.P. Khanna; 2009