Causes of law of increasing returns, diminishing returns and negative returns ?............ Please give ans. In points
Causes of Initial Increasing Returns:The phase of increasing returns starts when the quantity of a fixed factor is abundant relative to thequantity of the variable factor. As more and more units of the variable factor are added to the constantquantity of the fixed factor, it is more intensively and effectively used. This causes the production toincrease at a rapid rate. Another reason of increasing returns is that the fixed factor initially taken isindivisible. As more units of the variable factor are employed to work on it, output increases greatly due tofuller and effective utilization of the variable factor.(ii) Stage of Diminishing Returns. This is the most important stage in the production function. In stage2, the total production continues to increase at a diminishing rate until it reaches its maximum point (H)where the 2nd stage ends. In this stage both themarginal product (MP) and average product of the variable factor are diminishing but are positive.Causes of Diminishing Returns:The 2nd phase of the law occurs when the fixed factor becomes inadequate relative to the quantity of thevariable factor. As more and more units of a variable factor are employed, the marginal and averageproduct decline. Another reason of diminishing returns in the production function is that the fixedindivisible factor is being worked too hard. It is being used in non-optima! proportion with the variable factor, Mrs. J. Robinson still goes deeper and says that the diminishing returns occur because the factorsof production are imperfect substitutes of one another.(iii) Stage of Negative Returns. In the 3rd stage, the total production declines. The TP, curve slopesdownward (From point H onward). The MP curve falls to zero at point L2and then is negative. It goesbelow the X axis with the increase in the use of variable factor (labor).Causes of Negative Returns:The 3rd phases of the law starts when the number of a variable, factor becomes, too excessive relative,to the fixed factors, A producer cannot operate in this stage because total production declines with theemployment of additional labor.A rational producer will always seek to produce in stage 2 where MP and AP of the variable factor arediminishing. At which particular point, the producer will decide to produce depends upon the price of thefactor he has to pay. The producer will employ the variable factor (say labor) up to the point where themarginal product of the labor equals the given wage rate in the labor market.
Causes for Increasing returns to factor :---
- Better Coordinations between the variable and fixed factors
- Efficient utilization of variable and fixed factors
- Efficient Ratio between the variable and fixed factors
Causes for Diminshing Decreasing Returns to factor :---
1. Poor Coordination between variable and fixed factors
2. Improper utilization of fixed and variable factors
3. Fixity of factors, that is , Poor ratio between variable and fixed factors.