Importance of law of variable proportions.
The law of diminishing returns occupies an important place in economic theory. The British classical economists particularly Malthus, and Ricardo propounded various economic theories, on its basis. Malthus the pessimist economist, has based his famous theory of Population on this law. The Ricardian theory of rent is also based on the law of diminishing return. The classical economists considered the law as the inexorable law of nature. The law of variable proportions has vast general applicability.
- It is helpful in understanding clearly-the process of production. It explains the input output relations. We can find out by-how much the total product will increase as a result of an increase in the inputs.
- The law tells us that the tendency of diminishing returns is found in all sectors of the economy which may be agriculture or industry where an increase in capital and labour applied causes the output to increase less than proportionally.
- The law tells us that any increase in the units of variable factor will lead to increase in the total product at a diminishing rate. The elasticity of the substitution of the variable factor for the fixed factor is not infinite.
- The law forms the basis of a number of doctrines in economics e.g. the Malthusian population theory originates from the fact that food supply does not increase as fast as the population growth because of the law of diminishing returns in agriculture.
- It helps to explain the low standard of living in many parts of the world especially in countries whose economies are based on agriculture.
- According to Ricardian theory, rent arises because of the operation of the law of diminishing returns of land which forces the landowners to cultivate inferior lands leading to rent on the better grade land.
- It helps an entrepreneur to determine the quantity of variable input that should be purchased.
From the law of variable proportions, it may be understood that there is hope for raising the standard of living of mankind by continually improving the technique of production through the progress in science and technology.