Micro Economics

In law of variable proportion theory there are three stages of production, which stage can be considered ideal stage to producer for continuing the production? Why other stage is not suggested ?

The concept of three stages highlighted in Prof. Dr. Alfred Marshal initiated majorly with other classical economist theory of variable proportion here we use a figure.

(Figure is taken from internet for reference)

In the given figure, TP is shown rise from convex to concave, remains still for short period and falls down with the increase in additional unit of labor. The nature of average production, marginal and total are outlined under in three different stages as shown in the figure above.

A. Stage I: This stage starts from the origin (0) and ends at the point where AP is maximum or point where MP and AP is equal to one another. The common nature of this stage is:

a. TP increases at increasing rate up to the point where MP is maximum and then increases at decreasing/diminishing rate.

b. MP and AP are equal where MP cuts AP from above.

c. MP increases and reaches to its highest point and then starts to increase in diminishing rate.

d. AP increase and reaches at maximum at the end of this stage.

B. Stage II: This stage starts from the point where the stage I ends. In fact, it starts from the point of maximum average production and ends at the point where marginal production intersects the line of x-axis or in simple term meets zero output. The common nature of this stage is:

a. Total product/production increases at the diminishing rate and in its short production cycle reaches in its maximum.

b. Though the MP and AP is decreasing it remains positive throughout this stage.

c. Average product is greater than Marginal product.

C. Stage III: This is the last stage in variable proportion law. This stage starts at the point where MP =0. The common nature seen under this stage are:

a. TP curve can be seen declining downward.

b. It should be noted that though the AP is decreasing it never reaches to negative.

c. The marginal product is negative going.  

Now, lets see which stage can be considered ideal for production.

After critically presenting all three stages we can conclude that stage II can be ideal stage for producer. The diminishing return nature of this stage is main reason behind it. This stage continues to operate until it reaches to the point of optimum utilization of factors of production. Though the production is increasing at diminishing rate, the MP and AP are positive which tells it is viable to keep on carrying production activities. The additional unit of variable factor when one factor is fixed decreases the production pace having the fact that fixed factor remains indivisible and there is always optimum combinations of factors. So, till the process reaches to stage III it is suggested to keep doing business.

Again, if only stage II is suggested to producer why stage I and III is not suggested.

In stage III, the marginal product is negative which means producer can increase production with the decrease in variable factor. Hence, even if the variable factor is avail in free of cost, it is suggested to stop production activities because it holds no good.

In stage II, the cycle does not ensure optimum utilization of factors of production. With the every additional variable factor of input, the total product keeps on rising because the optimum combination between factors is not yet met. Hence, in given the fixed factor of input, it is suggested to add more variable factors of production.

Happy Reading!