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 more reliable approach towards the methodology of economic analysis was introduced by the "German Historical School of Economists" in the form of inductive method. The German school was represented by famous economists like Roscher, Hilbrand and Frederick. They were of the view that deductive method leads to many misleading conclusions conducted on the basis of incorrect assumptions.
Deductive method is known by variety of its names like analytical, abstract or prior method. This method is also known as hypothetical method. This method is based on the process of model building where conclusions are derived from general principles. When economic analysis is conducted through deductive method, the economic analyst has to proceed from general to particular.
The Marginal Productivity Theory is based on the operation of the Law of Diminishing Returns. As we employ more and more of a factor in the production of a commodity, returns from its fall. We shall therefore employ a factor only so long as its productivity exceeds its remuneration.
According to this theory the entrepreneur or owner of a firm can measure the value of marginal productivity of factors of production, and thus he can try to equate it with the prevailing factor rate in the market. However it is sometimes difficult to know the value of marginal productivity of factors of production
Theory states that reward of each factor of production tends to be equal to its marginal productivity in other words "Distribution according to "Contribution". Marginal Productivity refers to the addition that the use of one extra unit of the factor makes to the total production.
The Theory of Distribution also known as Pricing of Factors of Production. The theory deals with the determination of the reward of the four factors of production. It is the analysis of how and in what manner the reward payments of the factors of production are determined.
Below are the advantages and disadvantages of communist economic system. Under comprehensive State planning, goods and services are produced strictly according to need. Anohter befit of communist economy is the elimination of large-scale wastage of resources.