(a) The phase of increasing returns starts when the quantity of a fixed factor is abundant relative to the quantity of the variable factor. As more and more units of the variable factor are added to the constant quantity of the fixed factor, it is more intensively and effectively used. This causes the production to increase at a rapid rate.

(b) Another reason of increasing returns is that the fixed factor initially taken is indivisible. As more units .of the variable factor are employed to work on it, output increases greatly due to fuller and effective utilization of the variable factor.

(c) Stage of Diminishing Returns. This is the most important stage in the production function. In stage 2, 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 the marginal product (MP) and average product of the variable factor are diminishing but are positive.