Tuesday, 3 May 2011

Operation of the law in agriculture and industry

The classical and neo-classical economists were of the view, that the law of diminishing returns applied to the agriculture only and an Non agricultural industries are the subject to the law of increasing returns. The modern economists have rejected this argument. They are of the view that law of diminishing return is a universal law, and it is applicable to agriculture and industry. They say that whenever the supply of any essential factor of production is fixed, the return per unit of variable factor falls.
In agriculture, this law applies soon because the land is a constant factor and it can not be increased according the over variable factors like labour and capital. The fixed factor may be land in agriculture or a labour in industry. Whenever the successive doses of labour and capital are applied to the fixed factor,after some time, the variable factor becomes more than sufficient as compared with the fixed factor. For example one thousand workers are more than sufficient for the 5 Acres of land or for the ten power looms. The proportion between the fixed and variable factor is not correct and marginal returns begins to fall. The modern economists call it the law of variable proportions.
The law of diminishing return is also called the law of increasing cost. Because as the successive unit of variable factor is applied the marginal returns begins to fall and cost per unit rises. According to assumption the cost of variable factor remains constant.

IMPORTANCE :- This law is the fundamental law of production. Malthus and Ricardo offered the various theories on the basis of the law of diminishing return. For example Malthus theory of population, Ricardo theory of rent and marginal productivity theory of distribution is based on the law of diminishing return. It is the diminishing returns which restricts the scale of production on a certain limit.

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