question_answer

What does the Law of variable Proportions show? State the behaviour of total product according to this law.

Or

Explain how changes in prices of other products influence the supply of a given product.

Answer:

According to this law, if more and more units of variable factor (labour) are combined with the same quantity of fixed factor (capital) then, initially the total product will increase. However, after a certain point of time, total product will start declining.
Assumptions of Law of Variable Proportions
(i) Technology level remains constant
(ii) The units of variable factors are homogeneous
(iii) One of the inputs must be fixed
(vi) No change in the input prices - wages and interests.
Behaviour of TP
Stages	Stage?s Name	TP	Range
I	Increasing Returns to a factor	TP increases at an increasing rate till K	From 0 to point K
II	Diminishing Returns to a factor	Increases at a decreasing rate and attains maximum	From K to point B
III	Negative Returns to a factor	TP starts to fall	From B onwards
Or
The supply of a given good depends on the price of other goods. In other words, the supply of the good depends on the price of its substitute goods and on the price of its complementary goods. The supply of a given good shares positive (negative) relationship with the price of its substitute goods (complementary goods).
In case of substitute goods: If the price of the substitute goods falls, then the consumer will shift their preference towards that good. As a result, the demand of the good reduces. Consequently, it is not profitable to supply this good, thereby the supply of the good reduces. For example, tea and coffee are substitute goods. If, the price of tea falls, then the supply of coffee will fall.
In Case of complementary goods: If the price of the complementary goods falls, then the consumer will shift their preference towards the given good. This will lead to increase in the demand of the given good. As a result, it becomes profitable to supply more of the good. Thereby, the supply of the good increases. For example, petrol and car are complementary goods. If, the price of petrol falls, then the supply of cars will increase.