The law of constant returns is also known as the law of constant cost in the study of economics.
Definition and Explanation:
The law of constant returns is said to operate when with the addition of successive units of one factor to fixed amount of other factors, there arises a proportionate increase in total output. The yield of equal return on the successive doses of inputs may occur for a very short period in the process of production. The law of constant return may prevail in those industries which represent a combination of manufacturing as well as extractive industries.
On the side of manufacturing industries, every increased investment of labor and capital may result in a more than proportionate increase in the total output. While on the other extractive side, an increase in investment may cause, in general, a less than proportionate increase in the amount of produce raised. If the tendency of the marginal return to increase is just balanced by the tendency of the marginal return to diminish yielding an equal return, we have the operation of the law of constant returns.
In the words of Marshall:
“If the actions of the law of increasing and diminishing returns are balanced, we have the law of constant return”.
Applications of the Law:
In actual life, the law of constant returns can operate (apply) only if the following conditions are fulfilled:
(i) There should not be any increase in the prices of raw materials in the industry. This can only be possible if commodities are available in large supply.
(ii) The prices of various factors of production should remain the same. The supply of various factors of production needed for a particular industry should be perfectly elastic.
(iii) The productive services should not be fixed and indivisible.
If we study the above mentioned conditions carefully, we will easily conclude that in the actual world, it is not possible to find an industry which obeys the law of constant returns. The law of constant returns can operate for a very short period when the marginal return moves towards the optimum point and begins to decline. If the marginal return, at the optimum level remains the same with the increased application of inputs for a short while, then we have the operation of law of constant returns. The law is represented now in the form of a table and a curve.
Example and Schedule (Table):
In the above table and example, the marginal return remains the same, i.e. 60 meters of cloth with the increased investment of inputs.
In figure (11.4) along OX, measured the productive resources and along OY is represented the marginal return. CR is the line representing the law of constant returns. It is parallel to the base axis.