Professional Documents
Culture Documents
SRAC’ SRAC’”
SRAC”
LRAC
A C
B
0 D E F
Output
Land
• Dr. Marshall defines land as, “ By land is
meant not merely land in the strict sense of
the word, but whole of the materials and
forces which nature gives freely for man’s
aid in land, water, in air and light and heat.”
• Characteristics:
– Free gift of nature
– Limited in area
– Permanent
– No mobility
– Infinite variety
Labor
• According to Marshall labor is, “ any exertion of mind
or body undergone partly or wholly with a view to
earning some good other than the pleasure derived
directly from the work.
• Features:
– Inseparable from laborer
– Sells service not himself
– More perishable than any other commodity
– Less bargain power
– Not machine (having feelings and emotions)
– Less mobile
– Supply independent of demand
– Difficulty in calculating cost of production
– Differ in efficiency
Capital
• Defined as that part of a person’s wealth,
other than land, which yields an income or
which aids in the production of further
wealth.
Entrepreneur
• To bring the factors of production together,
assign each its proper task, and pay them
remuneration when the work is done.
• Functions of an entrepreneur
– Conceiving and initiating
– Organizing
– Directing and supervising
– Control
– Risk-taking
– innovation
Law of Variable Proportions
• In economics, the production function with one variable
input is illustrated with the well-known Law of Variable
Proportions. The law of variable proportion is one of the
fundamental laws of economics. It has also been called
as the law of diminishing marginal returns (also
sometimes known as Law of Diminishing Marginal
Productivity).
• One factor fixed and other variable
• In short-run, input-output relations are studied with one
variable input (labor), other inputs (especially capital)
held constant.
Assumptions of The Theory
• Constant technology: If technology changes, marginal
and average product may rise instead of diminishing.
• Short run: The law operates in the short run because it is
here that some factors are fixed and others are variable.
In the long run, all factors are variable.
• Homogeneous inputs: The variable input as applied unit
by unit is homogeneous or identical in amount and
quality.
• It is possible to use various amounts of a variable factor
on the fixed factors of production.
Law of Variable Total Physical Marginal Average
Stage I
Increases at an Increases, Increases and
increasing rate reaches its reaches its
maximum and maximum
then declines till
MP = AP
TP
Stage 1 Stage 2 Stage 3 Stage II
Increasing Decreasing Negative Increases at a Is diminishing Starts
returns returns diminishing rate and becomes diminishing
returns till it reaches equal to zero
maximum
AP