Law of Increasing Returns - Explanation
The law of increasing returns
can be illustrated with the help of a schedule and a diagram.
The above table shows with the
successive increase of units of variable factors (labor and capital) while keeping
the units of fixed factor (Machine) constant, the marginal and total output of
bottles are increasing. We can see the marginal out is increasing till 5th
unit of variable factors. After the 5th unit, the marginal output is
decreasing which means the law of increasing returns is in operation and
machine has reached to its full capacity.
Thus, the increase of marginal output till 5th unit of
variable factors is representing the law of increasing returns.
In the above diagram (2.2), units
of capital and labor on X- axis and marginal output on Y-axis have been
measured. FPR is the marginal output
curve which is rising upward from left to right. We can see the marginal output
is increasing with increase of units of variable factors (labor and capital). This
increase of marginal output is representing law of increasing returns.
Also read:
Law of diminishing returns
Law of diminishing marginal utility
Law of demand
Also read:
Law of diminishing returns
Law of diminishing marginal utility
Law of demand
Law of Diminishing Cost
When variable factors such as
labor and capital are used successively, the business expands and moves
towards the optimum and the cost of production is falling. Therefore, the law
of increasing returns also known as the law of diminishing cost. It can be
illustrated with the help of a table.
The above table shows that the
units of machine is fixed at 7 and units of labor is variable. We can
see the marginal output is increasing with successive application of labor. We have assumed the cost of each unit of labor is Rs.
3500, therefore marginal cost of each bottle is declining. Thus, we can say law
of increasing returns is similar to the law of diminishing cost.
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