Limitations of the Law of Variable Proportions

The law of diminishing returns renamed as the law of variable proportions is a universal law. Given the assumptions, the law is bound to operate. However the following limitations of the law may be carefully noted:

• When a piece of land is newly cultivated, we may observe increasing addition yield in the earlier phases of cultivation. This may happen until the land is most efficiently cultivated. The marginal returns will first rise and then after a point, it will decrease. In our example the stage of diminishing returns comes after the 3^rd dose of labour. But it may so happen that in a matured land cultivated for a long time, the marginal yield may decline from the 2^nd dose of labour. Hence the exact point of diminishing productivity may differ from situation to another.

• The law of diminishing returns will not apply if the technique of production changes. If the labour continues to cultivate with ox-driven traditional wooden plough, then the process must continue. If suddenly tractor is introduced, then marginal productivity will increase. Marshall therefore states that an increase in produce raised, unless it happens to coincide with an improvement in the an agriculture.

• However it is important to note that technological development cannot check the operation of diminishing returns for all time to come. Temporarily it may bring increasing returns for all time come. Temporarily it may bring increasing returns when the art cultivation improves but ultimately diminishing returns will prevail.

• It is also pointed out that the doses of labour and capital must be of adequate quantity in comparison to land. If they are less than the optimum dose, then the law may not operate for a long time. But ultimately it will operate as the law is universal and a logical necessity.

It is pointed out the law of increasing returns may or may not operate. That means it is not universal in its operation as the law of diminishing returns. This is because increasing return depends on organisational efficiency and managerial ability which differ from to firm. Merely increasing labour and capital may not bring increasing returns. It must be backed by orgainisational efficiency. Since this differs from firm to firm, Mrs. Joan Robinson calls increasing returns as the empirical fact.