Stage II:
Diminishing Returns – TP continues to increase but at diminishing rates, both AP and MP are positive but
declining.
Stage III:
Negative Returns – TP begins to decline, indicated by negative MP
Total Product Marginal Product Average Product STAGE I Increases at an increasing
rate then increases at
diminishing rate
Increases and reaches its
maximum and begins to
diminish
Increases (but slower than
MP)
STAGE II Increases at a diminishing
rate and becomes
maximum
Continuous to diminish
and becomes equal to
zero
Becomes equal to MP and
then begins to diminish
STAGE III Reaches its maximum,
becomes constant and
then starts declining
Keeps on declining and
becomes negative
Continues to diminish (but
must always be greater
than zero)
Factors behind the law Stage I
-
Indivisibility of fixed factors
-
Division of labour (specialization)
Stage II
-
Non optimal proportion with the variable factors
-
Limit of specialization has crossed
Stage III
-
Improper substitution of variable factor for fixed factor
Laws of Returns to Scale The percentage increase in output when all inputs vary in the same proportion is known as returns
to scale. It obviously relates to greater use of inputs maintaining the same technique of production.
Three Situations of Returns to Scale
Increasing Returns to Scale – Output increases by a greater proportion than the increase in input.
