Unit-3 Law of Constant Return POE | BBA First Year

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Constant Return Rules

• The law of constant returns is said to apply when additional investments of labor and capital yield the same returns as before.
• This means that returns from investments remain the same as the business expands or contracts.
• According to Stigler “When all productive services increase in a certain proportion, the product also increases in the same proportion.”
• The law of constant returns remains active for some period of time. From where the law of increasing returns ends, the law of constant returns begins and after this law ends, the law of diminishing returns begins.

This law can be understood from the following example:

• From this table it is clear that with increase in the unit of labor and capital, total production increases but marginal production remains constant, i.e. 30 is a constant figure; And this figure is the law of constant returns.

Diagrammatic representation

• This law of constant returns can be represented in a diagram as follows

•  The AB line is the law of constant returns because it shows that the marginal product of the fan remains the same despite the increase in the unit of labor and capital. In other words, here the AB line is the law of constant returns.

Why the rule of constant returns

• In every industry we find the influence of man and nature. Nature controls the supply of raw materials while man directs the manufacturing side. If there is an industry where raw material cost and manufacturing cost are half-and-half, then we can say that both humans and nature impact equally. Such an industry would be subject to the law of constant returns. For example – Woolen blanket weaving industry. 

2Why the rule of constant returns

• Furthermore, the rules of constant returns may apply if there is integration of extractive and manufacturing industries such as sugar making and sugarcane growing, steel making and iron-ore mining. 
• It is possible for both of these tendencies to balance each other resulting in the Rules of constant returns working. Thus, we find that in every industry two tendencies exist and work continuously, one of diminishing returns and the other of increasing returns. 

3Why the rule of constant returns

• This increases the cost of production per unit or the law of diminishing returns operates. But the larger the scale, the greater will be the economy in use of machinery, division of labour, buying and selling, research and promotion etc.
• However, in real life, either the trend of decreasing returns is stronger or the trend of increasing returns is stronger. Thus, the operation of the rules of constant returns is rare and if it operates at all, it lasts only for short periods of time.
  

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There are mainly two factors that give rise to the law of increasing returns to scale:

1. Inseparability of factors of production.

2. Specialization of factors of production

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