The law of variable proportions is an economics term that describes when a business increases one factor of production while keeping another factor constant, causing the increase of production levels created through these changing factors to decrease gradually. In essence, this law describes changing the proportion of two or more factors in a process used to create the same product to increase returns, eventually resulting in lesser output.
Also known as the law of diminishing returns and the law of proportionality, the law of variable proportions is described in three stages.
- During the first stage of increasing returns, total production increases due to the efficiency of the unchanged factors in combination with the variable factor. At the most productive point, production begins leveling out.
- In the second stage of diminishing returns, total production continues to increase but at a much slower rate, but the output is still positive.
- During the third stage of negative returns, the total production declines steadily as variable factor costs exceed the fixed factor costs.