When more and more units of a variable input are added with the fixed input, the marginal product would increase only upto a certain point. Thereafter, the marginal product declines. This phenomenon is known as the Law of Variable Proportions. It is also known as returns to a factor. The shape of TP, AP and MP suggests that they are specifically passing through three phases.
They are:
First phase :
In the first stage, both AP and MP increase. As a result TP also increases at an in creasing rate. This stage is known as the stage of increasing return to a factor. AP reaches the maximum level in this stage.
Second phase :
Both AP and MP decrease at this stage. The TP increases at a decreasing rate. More importantly, TP reaches maximum and MP touches zero. This stage is also known as the stage of diminishing returns to a factor.
Third phase :
At this stage, the MP becomes negative. As a result, TP also starts declining. The decline of AP is continuous. In the graph, when TP reaches maximum and MP touches zero. When MP becomes negative, TP starts declining. This stage is known as the stage of negative returns to a factor.
