The law of variable proportions shows a particular pattern of changes in output and is an explanation of short run production function where some factors remain unchanged. In the history of economics till the time of Alfred Marshall, there were three laws of return, increasing, constant and diminishing laws of return. Much time was wasted in this issue. However, it was later on realized that there are three stages of production
The Modem Theory of pricing of factors of production also known as "Demand and Supply Theory" gives a satisfactory answer to the problem of determining factor prices. According to the theory just as the price of a commodity which is determined by the forces of demand & supply, similarly the price of a factor of production is also determined by the demand for that factor and its supply.
The law is also known as the law of increasing costs. It is one of the important laws of microeconomics. The law of diminishing return indicates that if the number of variable inputs is increased with some fixed inputs, the total output will first increase but then start to decline. It is the third stage of the law of variable proportions. The law is applicable both in agricultural and industrial sectors.
The law of Increasing Returns is also known as the Law of Diminishing Costs. According to this law when more and more units of variable factors are employed while other factors are kept constant, there will be an increase of production at a higher rate. This law is applicable to all different industries and partially applicable in agricultural sector.
A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words it is the direct exchange of goods for goods. According to Prof Standy, barter economy is such an economy in which there is no use of a generally acceptable medium of exchange
Control on Money Supply. The central bank being the note issuing authority enjoys full powers to control the money supply injected through excessive credit creation. For the purpose it applies different instruments to control it. The instruments by which the central hank controls the money supply rate.
Following are the causes of inflation Increase in quantity of money, government expenditures & consumer's disposable income, oil prices, deficit financing, decline in production, devaluation in currency, increase in population, black money, excessive profit
By inflation we mean rising of prices but on the other hand it is also a reduction in the value of money. The reduction in the value of money affects the entire economy. When the price level tends upward the investment attitude flourish among the businessmen with the aim to earn more profit.