Explain application of law of return in industry and agriculture.

Posted: January 2, 2013 in Education
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Explain application of law of return in industry and agriculture.

The law of diminishing returns specially applies to agriculture and other extractive industries. One thing that is common to all these industries is the supremacy of nature.

It is therefore often remarked that the part that nature plays in production corresponds to diminishing returns and the part which man plays confirms to the law of increasing returns. The reason is that, nature where it is supreme is subject to diminishing returns, while industry where man is supreme is subject to increasing return. The agricultural operations are spread out over a wide area, and supervision cannot be very effective.

Application of the Law of Returns in Industries:
There are certain manufacturing industries where the factors of production can be combined and substituted up to a certain limit; it is the law of increasing returns which operates.

The increasing returns mainly arise from the fact that large scale production is able to secure certain economies of production, both internal and external. When an industry is expanded, it reaps advantages of division of labor, specialized machinery, commercial advantages, buying and selling wholesale, economies in overhead expenses, utilization of by products, use of extensive publicity and advertisement, availability of cheap credit, etc..

Assumptions:
The law rests upon the following assumptions:

a) There is a scope in the improvement of technique of production.
b) At least one factor of production is assumed to be \ indivisible.
c) Some factors are supposed to be divisible.

Example:
The law of returns can also be explained with the help of a schedule and a curve.

Schedule:
Inputs Total Returns Marginal Returns
1 100 100
2 250 150
3 450 200
4 750 300
5 1200 450
6 1850 650
7 2455 605
8 3045 600

In the above table it is dear that as the manufacturer goes on expanding his business by investing successive units of inputs, the marginal return goes on increasing up to the 6th unit and then it beings to decline steadily.

The marginal returns has diminished after the sixth unit because of the non-availability of a factor or factors of production or the size of the business has become so large that it has become unwieldy to manage it, or the plant is producing to its full capacity and it is not possible further to reap the economies of large scale production, etc.

Diagram:
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In above figure, along OX axis are measured the units of inputs applied and along OY axis the marginal return is represented. PF is the curve representing the law of increasing returns.

Application of the Law of Returns in Agriculture:
As the most important law of production, and indeed of political economy as a whole. This is what is called “The Law of Diminishing Production,” or more fully and exactly, “The Law of Diminishing Returns in Agriculture.”

This generally law of agriculture industry is the most important proposition in political economy. Were the law different nearly all the phenomena of the production and distribution of wealth would be other than they are.

This law of diminishing returns in agriculture, applies also to mining, and in short to all the primary or extractive industries, which give the character of wealth to what was not before wealth, but not to those secondary or subsequent industries which add an additional increase of wealth. Thus since the law of diminishing productiveness in agriculture does not apply to the secondary industries, it is assumed that any increased application of labor and capital in manufacturing for instance, would continue to yield a proportionate and more than proportionate return.

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