Returns to a factor relates to the behavior of total output as one variable input say labour is varied. It is a short run concept. There are three aspects of returns to a factor. 1. Increasing Returns to a factor, 2. Constant Returns to a Factor, and 3. Diminishing Returns to a Factor.
Diminishing returns to a factor may occur due to following reasons:- 1. Fixity of the factor: As more and more units of the variable factor continue to be combined with the fixed factor, the later gets over-utilized. 2. Imperfect Substitution among Factor: Beyond a certain limit, factors of production can not be substitute for one another e.g. more and more of labour cannot be continuously used in place of additional capital.
What do you understand by returns to factor? Why do diminishing returns to a factor operate?
Answers
KRISHNA
Returns to a factor relates to the behavior of total output as one variable input say labour is varied. It is a short run concept. There are three aspects of returns to a factor.
1. Increasing Returns to a factor,
2. Constant Returns to a Factor, and
3. Diminishing Returns to a Factor.
Diminishing returns to a factor may occur due to following reasons:-
1. Fixity of the factor: As more and more units of the variable factor continue to be combined with the fixed factor, the later gets over-utilized.
2. Imperfect Substitution among Factor: Beyond a certain limit, factors of production can not be substitute for one another e.g. more and more of labour cannot be continuously used in place of additional capital.