Laws of
Returns:
A given output can be produced with
many different combinations of factors of production (land,
labor, capita! and organization) or inputs.
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There were three laws of returns
mentioned in the history of economic thought up till Alfred
Marshall's time. These laws were the laws of increasing returns,
diminishing returns and constant returns.
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The law of diminishing returns
(also called the Law of Increasing Costs) is an
important law of micro economics.
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The law of increasing returns
is also called the law of diminishing costs. The law of
increasing return states that when more and more units of a
variable factor is employed, while other factor remain fixed,
there is an increase of production at a higher rate.
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Law of Constant Returns:
The law of constant returns
also called law of constant cost. It 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.
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Law of Costs is also
known as laws of returns. As an industry is expanded with the
increased investment of resources, the marginal cost (i.e., the
amount which is added to the total cost when the output is
increased by one unit) decreases in some cases, increases in
others and in some, it remains the same.
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The law of returns are often
confused with the law of returns to scale. The law of
returns operates in the short period. It explains the production
behavior of the firm with one factor variable while other
factors are kept constant.
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