If units of a variable factor are increasingly added to a fixed factor and the marginal physical product keeps increasing, production is said to be taking p...

If units of a variable factor are increasingly added to a fixed factor and the marginal physical product keeps increasing, production is said to be taking place under conditions of?

Answer Details

When units of a variable factor, such as labor or raw materials, are added to a fixed factor, such as capital or land, and the marginal physical product (MPP) of the variable factor keeps increasing, then production is said to be taking place under conditions of increasing returns to the variable factor. This means that as more units of the variable factor are added, the total output produced increases at an increasing rate. This is because the additional units of the variable factor are able to use the fixed factor more efficiently and productively, resulting in higher MPP. This is also referred to as the law of diminishing marginal returns, which states that as more units of a variable factor are added to a fixed factor, the marginal product of the variable factor will eventually decrease. In contrast, increasing returns to scale refer to a situation where all inputs are increased in the same proportion and output increases at a greater rate than the increase in inputs. Constant returns to the variable factor occur when the increase in output is proportional to the increase in input, and external economies of scale occur when the growth of an industry leads to lower costs for all firms in the industry due to shared infrastructure or resources.