THE STAGE OF INCREASING RETURNS

The Stage of Increasing Returns: 

In this stage, the total product increases at an increasing rate upto a point (in figure upto point F), marginal product also rises and is maximum at the point corresponding to the point of inflexion and average product goes on rising. From point F onwards during the stage one, the total product goes on rising but at a diminishing rate. Marginal product falls but is positive. The stage 1 ends where the AP curve reaches its highest point.

Thus in the first stage, the AP curve rises throughout whereas the marginal product curve first rises and then starts falling after reaching its maximum. It is to be noted that the marginal product although starts declining, remains greater than the average product throughout the stage so that average product continues to rise.

Explanation of law of increasing returns:

 The law of increasing returns operates becausein the beginning, the quantity of fixed factors is abundant relative to the quantity of the variable factor. As more units of the variable factor are added to the constant quantity of the fixed factors, the fixed factors are more intensively and euectively utilised i.e., the eflciency of the fixed factors increases as additional units of the variable factors are added to them. This causes the production to increase at a rapid rate. For example, if a machine can be eflciently operated when four persons are working on it and if in the beginning we are operating it only with three persons, production is bound to increase if the fourth person is also put to work on the machine since the machine will be euectively utilised to its optimum. This happens because, in the beginning some amount of fixed factor remained unutilised and, therefore, when the variable factor is increased, fuller utilisation of the fixed factor becomes possible and it results in increasing returns. A question arises as to why the fixed factor is not initially taken in a quantity which suits the available quantity of the variable factor. The answer is that, generally, those factors which are indivisible are taken as fixed. Indivisibility of a factor means that due to technological requirements, a minimum amount of that factor must be employed whatever be the level of output. Thus, as more units of the variable factor are employed to work with an indivisible fixed factor, output greatly increases due to fuller utilisation of the latter. The second reason why we get increasing returns at the initial stage is that as more units of the variable factor are employed, the eflciency of the variable factor increases. This is because introduction of division of labour and specialisation becomes possible with suflcient quantity of the variable factor and these results in higher productivity.

Goods and Service Tax Book (Updated upto 20th January 2018)

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. 

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Author Name- CA Harshita Raichandani and CA Dhananjay Ojha

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GST (Goods and Services Tax) Book -A student friendly Book. - Bharat Gurukul

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Inte