The Law of Constant Returns

The Law of Constant Returns:

Another law of returns is known as the law of constant returns (or constant costs). It represents the transition between the law of increasing returns and the law of diminishing returns or vice versa. The law of constant returns, thus, establishes a relationship between the other two laws of returns.

The law of constant returns may be defined in the words of Prof. Stigler as follows: “When all of the productive services are increased in a given proportion, the product is increased in the same proportion.” The point to be noted here is that all the productive factors are to be increased in a given proportion. There is no question of keeping one-factor constant and increasing the others in a given proportion. If two factors, A and B are required for the manufacture of a commodity, and A + B results in P product coming into existence, then, according to the law of constant returns, 2A + 2B will aid 2P as the output. In other words, if the productive factors are increased in a given proportion, then, according to the law of constant returns, the output will increase exactly in the same proportion.

Since the output increases exactly in the same proportion in which the productive factors are increased, the costs do not change, but, on the contrary, remain constant. This is the reason why the law of constant returns is also known as the law of constant costs.

The law of constant returns is important because its operation in an enterprise reflects an ideal or optimum combination of the various factors of production. So long as the increasing returns operate, the factors of production are not in an optimum combination. It is only when the increasing returns are replaced by constant returns that the various factors of production can be said to be in optimum combination. The operation of the law of constant returns is also a warning to the entrepreneur that if he proceeds further in the direction of expansion of the unit, he will be entering the danger zone of diminishing returns, or increasing costs.