Law of increasing returns appears in the initial stage of production. When variable factor is increased on fixed factors of production, total production increases and it signifies increasing returns to a factor.
Law of increasing returns operates due to organisational improvement that occur due to increased use of factors of production. Working efficiency of factors increases and external as well as internal economies of large scale are obtained in the production. Consequently, optimum utilisation of fixed and indivisible factors becomes possible and AP alongwith MP continues to increase.
Table : Increasing Returns to a factor
Diagrammatic Representation: If table is plotted on graph paper, then in case of increasing returns to a factor, following shapes of AP and MP are obtained. It is clear from the figure that, as production is increased and units of variable factors are increased, AP and MP both start increasing. But increase in MP is greater a compared to AP.
Causes of operation of Increasing Returns to a Factor : There are following causes of operation of increasing returns to a factor :
(a) Fixed Factors: Costs of fixed factors is also fixed. Cost per unit of production decreases with every increase in production. As a result of it, this law becomes operative.
(b) Indivisibility of Factors: This reason was pointed out by Mrs. Joan Robinson. According to Mrs. Robinson, there are few factors, which can not conveniently be divided and it becomes necessary to use them in available quantity ( e.g., big and heavy machines, engines, etc.). Fixed factors could not be fully utilised in the beginning with lesser units of variable factor. But as the variable factors continue to increase, fixed factors are optimally utilised. As a result of it production increases but cost starts decreasing. In this way indivisibility of factors leads the operation of the law of increasing returns to a factor.
(c) Better co-ordination between Factors : Till fixed factors are under utilised, increase in units of variable factor increases co-ordination between fixed and variable factors. As a result of it, production increases of a greater pace.
