The third phase of the Law of Variable Proportions is the stage of Negative Returns. In this phase, with every successive increase in the quantity of variable factor employed, the additional returns are negative and therefore the total returns start diminishing. In other words, in this phase the marginal physical product of the variable factor becomes negative.
This phenomenon of negative returns in phase III arises due to the fact that the amount of variable factor has become excessive relative to the fixed factor. For example, if the variable factor is labour, it means that now instead of cooperating in production, the workers come in the way of each other thus creating nuisance value. This happens, which for example, too many persons are engaged in cultivating on a given piece of land where instead of helping each other in production, they cause over – crowding and chaos and thus hamper each other’s work. In such a case, the contribution returns become negative and the total returns start diminishing. Further, too much of a variable factor, may also lead to the inefficiency of the fixed factor as well. In case of a capital, which is a fixed factor, too much of labour may cause lot of wear and tear of machinery, frequent breakdowns and excessive cost of maintenance. This is bound to affect total production adversely. Similarly, when land is a fixed factor, too much of labour may exhaust its fertility rendering the land barren and infertile, which in turn will cause loss in total production. In such a situation, it is advisable to reduce the units of the variable factor than to increase it with a view to getting maximum production.
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