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Law of variable proportions

Explain in detail the Law of Variable proportion / Return to a factor Proportion. Give its causes

Ans:- Meaning of law of variable:- Law of variable proportion Refers to “When one factor is increased while other factors of production are constant then total output will increase”.

Definition of law of variable proportion:-

According to leftwich “The law of variable proportion states that if the input of one resource is increased while the input of other resources are constant, total output will increase”.

In other words:- A single variable of inputs is increased in the production process while the other factor of inputs remains constant causing an increase in production. law of variable proportions.

On account of change in proportion of factors is called the law of variable proportions. Due to change in proportion of input factor causing change in production at first phase is increasing then after it becomes constant then beyond this it becomes diminishing in the production of process function. law of variable proportions

Law of variable proportion | Return to a factors
A Single Variable Factor ( Other Factors Constant )
It ia a Short Run Analysis

The law of variable proportions has three different phases.

  • Increasing Return to a Factor
  • Constant Return to a Factor
  • Diminishing Return to a Factor
  1. Increasing Return to a Factor:- It is a situation in which total output tends to increase at an increasing rate when more of the variable factor is combined with the fixed of production. In which marginal product is increasing and cost marginal product must be diminishing. law of variable proportions
Explanation

Table shows the operations of increasing return to a factor.

Units Of Labour

Units Of Capital

Total Product

Marginal Product

1

1

4

4

2

1

10

6

3

1

18

8

4

1

28

10

5

1

40

12

Figure shows

This table shows that more and more units of labour are combined with the fixed amount of capital.

Total marginal product is increasing at the increasing rate. While the total product increased in production. law of variable proportions

Note:- Increasing to a factor leads to Diminishing cost. As a law of increasing return, When the output is increased, average cost per unit goes on diminishing.

  • Causes of increasing Return to Scale

( I ) Fixed Factor:- Underutilization remains of fixed factor. Its full utilisation calls for greater application of the variable factor.

Example – A small plant manufacturing cloth. The size of the plant is fixed in a short period. Five workers are required to get maximum output out of this plant. If a firm hires only two workers then production would be inefficient. The plant would be more efficiently utilised if more workers are added. law of variable proportions

( II ) Increase in efficiency :- Due to increase in variable units of input leads to possibility of division of labour and specialisation. Division of labour increases efficiency and efficiency leads to more production.

( lll ) Better Coordination between factors :- Additional application of variable factor of input tends to improve the efficiency of constant factor of input. Due to which production will be increased. law of variable proportions

  1. Constant Return to a Factor:- It is the stage when increasing application of the variable factor results in no increase in the marginal product of the factor. Rather, the marginal product of the factor tends to stabilise.

In other words:- Constant return to a factor occurs when additional application of the variable factor increases output also increases at the constant rate. law of variable proportions

Constant Cost :- Cost of production will remain constant at the constant Return of Law. gndupapers.online

Following Table shows proper Understanding

gndupapers.online

Units of Labour

Units of capital

Total Product

Marginal Product

1

1

5

5

2

1

10

5

3

1

15

5

4

1

20

5

5

1

25

5

Table shows that as more and more units of labour are combined with the fixed amount of capital, total output increases only at the constant rate. Marginal product of the variable factor remains constant. law of variable proportions

We can also understand the graph of constant return of factor

Figure A. As Total product increases at the constant rate indicated by an upward sloping straight line TO curve.

Figure B. Shows constant marginal product of the variable factor, indicated by horizontal straight line MP.

  • Causes of Constant Return to a Factor

( I ) Fixed Factor :- With the increasing of variable factor production is increased, however, a stage comes when the fixed factor gets optimally utilised. Here the marginal product of the variable factor is maximised and tends to remain constant.

( ll ) Factor Ratio :- It is an Ideal factor Ratio between fixed and variable factor. Hence, Marginal product of the factor stabilises at its maximum.

( lll ) Variable Factor :- A combination of fixed factor and variable factor a stage comes when there is best division of labour. Where variable factor is most efficiently Utilised. Here marginal product tends to be constant at its maximum. law of variable proportions

  1. Diminishing Return to a Scale:- It refers to a situation in which total output tends to increase at the diminishing rate when more variable factor is combined with the fixed factor of production. In such a situation marginal products must be diminishing.

In other words :- As more and more units of labour are employed on a given piece of land, the marginal product of the additional units of labour will go on diminishing. law of variable proportions

Note Increased Cost:- The law of diminishing return gives the cost of production is increased.

Following Table shows proper understanding

Diminishing Return to a Factor

Units of Labour

Units of capital

Total Production

Marginal Production

1

1

5

5

2

1

8

3

3

1

10

2

4

1

11

1

5

1

11

0

6

1

10

– 1

Tables show that as more and more units of labour are combined with fixed capital, the total capital increases only at a decreasing rate. Or it may even stop increasing at all or further start diminishing. Marginal product of the variable factor is diminishing and beyond a point it becomes zero or Even Negative.

We can properly understand with the help of Following Figure.

Figure:- A Total Product is increasing at the decreasing rate as indicated by the slope of the TP curve. At point p It becomes maximum and beyond that, it starts reducing. law of variable proportions

Figure:- B Shows diminishing marginal product of the variable factor, indicated by downward sloping MP curve. Beyond a point it becomes zero or Even negative. law of variable proportions

Conclusion:- we can understand the concept law of variable proportion or Return to a factor. Which includes Increasing, constant and Diminishing law of return to a factor. Here some causes of these are discussed also for the proper understanding. You can check the syllabus of Business Economics for BCom-ll on the official website of GNDU.

law of variable proportions

Essential question of Business Economics

  1. Return to a Scale
  2. Price Elasticity of demand

law of variable proportions

Goals and functions of e-commerce

Define the term E-Commerce. Discuss in detail the goals and functions of e-commerce in detail.

Definition of E-Commerce

E-commerce (electronic commerce) refers to the buying and selling of goods and services over the internet for the business. It involves online transactions between businesses, consumers, and other organizations through websites, mobile applications, and digital platforms. E-commerce eliminates geographical barriers, enabling businesses and consumers to connect globally. Define the term E-Commerce. Goals and functions of E-Commerce

Goals of E-Commerce

1. Expanding Market Reach

E-commerce enables businesses to reach a global audience, removing the limitations of physical stores. Companies can sell their products and services to customers in different regions without opening new physical locations.

2. Enhancing Customer Convenience

With 24/7 availability, e-commerce allows customers to shop at their convenience. Online stores offer easy browsing, product comparisons, and multiple payment options, making shopping more efficient.

3. Cost Reduction

E-commerce helps businesses reduce operational costs by minimizing expenses related to rent, utilities, and in-store staffing. Automation of processes like inventory management and order processing also lowers costs. Goals and functions of e-commerce

4. Increasing Sales and Revenue

By reaching a wider audience and offering personalized recommendations, businesses can increase sales. Special discounts, targeted advertising, and easy payment options further encourage purchasing.

5. Improving Customer Engagement and Experience

E-commerce platforms use chatbots, AI-driven recommendations, and personalized marketing to enhance customer engagement. Providing quick responses and tailored experiences leads to customer satisfaction and brand loyalty. Goals and functions of e-commerce

6. Efficient Business Operations

E-commerce integrates various functions such as inventory management, order fulfillment, and customer relationship management, streamlining business operations and improving efficiency.

7. Data-Driven Decision Making

E-commerce platforms collect valuable data on customer behavior, preferences, and purchasing patterns. Businesses can use analytics to optimize pricing, marketing strategies, and inventory management.

Functions of E-Commerce

1. Online Buying and Selling

E-commerce facilitates direct transactions between buyers and sellers through websites, mobile apps, and marketplaces like Amazon, eBay, and Shopify. Goals and functions of e-commerce

2. Electronic Payment Processing

E-commerce platforms support digital payment methods such as credit/debit cards, digital wallets (PayPal, Google Pay), and cryptocurrencies, ensuring secure and efficient transactions.

3. Supply Chain and Inventory Management

E-commerce systems track inventory levels in real-time, ensuring stock availability and optimizing supply chain management to prevent overstocking or shortages. Goals and functions of e-commerce

4. Digital Marketing and Advertising

E-commerce businesses use search engine optimization (SEO), social media marketing, email campaigns, and personalized advertisements to attract and retain customers.

5. Customer Relationship Management (CRM)

E-commerce platforms integrate CRM tools to track customer interactions, manage queries, and offer personalized support, enhancing customer satisfaction. Goals and functions of e-commerce

6. Logistics and Order Fulfillment

E-commerce companies collaborate with logistics providers to ensure timely shipping, tracking, and delivery of products, improving overall service quality.

7. Mobile Commerce (M-Commerce)

With the rise of smartphones, e-commerce businesses optimize their platforms for mobile users, offering mobile apps and responsive websites to facilitate seamless shopping.

8. Security and Fraud Prevention

E-commerce platforms implement encryption, two-factor authentication, and fraud detection mechanisms to protect customer data and ensure secure transactions. Goals and functions of e-commerce

9. Global Trade and Cross-Border Transactions

E-commerce enables businesses to sell internationally, supporting multiple currencies, languages, and shipping options to cater to a global audience.

Conclusion

E-commerce has transformed the way businesses operate and how consumers shop. By expanding market reach, reducing costs, improving efficiency, and leveraging digital tools, e-commerce continues to drive economic growth and innovation worldwide. Its functions, including online sales, digital payments, logistics, and customer management, make it an essential part of the modern business landscape. You can check the syllabus of E-Commerce for Mcom-lV on the official website of Gndu.

Important questions of E-Commerce

  1. Revenue models of E-Commerce
  2. Emerging trends in E-Business

What is the difference between pure online business and Brick-and-click business?

Differentiate between pure online and brick and click business. Describe tools for promoting websites in online business.

Meaning of Pure Online Business:- pure online business is a company that operates entirely on the internet without any physical presence, such as a brick-and-mortar store or office. These businesses conduct all their activities—sales, customer service, marketing, and operations—through digital platforms.

Examples of Pure Online Businesses:

– E-commerce Stores (e.g., Amazon, eBay)

– Digital Services (e.g., Netflix, Spotify)

– Online Education Platforms (e.g., Udemy, Coursera)

– SaaS (Software as a Service) Companies (e.g., Dropbox, Zoom)

Such businesses benefit from lower operational costs, global reach, and 24/7 availability. However, they also face challenges like cybersecurity risks, intense online competition, and digital marketing dependencies. What is the difference between pure online business and Brick-and-click business? 

Meaning of Brick-and-Click Business

A brick-and-click business is a type of company that operates both a physical (brick-and-mortar) store and an online (e-commerce) presence. This model allows customers to shop in person at retail stores and also purchase products or services online through a website or mobile app. What is the difference between pure online business and Brick-and-click business?

Examples of Brick-and-Click Businesses

  1. Walmart – Customers can shop in physical stores or order online for home delivery or in-store pickup.
  2. Apple – Sells products in physical Apple Stores and through its official website.
  3. Target – Offers in-store shopping, online shopping, and curbside pickup.
  4. Nike – Has retail stores worldwide and an online platform for purchasing products.
  5. Best Buy – Operates physical electronics stores and an online store with delivery and pickup options.
  6. Starbucks – Customers can order drinks online via the mobile app or visit a physical store.
  7. Zara – Allows customers to buy clothing in-store or through its website and mobile app.

This business model benefits from both physical retail engagement and the convenience of online shopping. Lets know What is the difference between pure online business and Brick-and-click business?

Difference Between Pure Online and Brick-and-Click Business

  1. Definition

Online Business:- A business that operates entirely online without any physical presence.

Brick-and-click Business:- A business that has both an online and physical store presence.

  1. Examples

Pure Online Business:- Amazon (before opening physical stores), eBay, Netflix (streaming), Udemy

Brick-and-click Business:- Walmart, Apple, Best Buy, Starbucks.

  1. Customers Interaction

Pure Online Business:- Digital interaction via website, emails, chatbots, and social media.

Brick-and-click Business:- Both digital and in-person interactions at physical stores.

  1. Overhead Costs

Pure Online Business:- Lower, as there is no need for rent, utilities, or in-store employees.

Brick-and-Click Business:- Higher, due to the cost of maintaining physical stores.

  1. Product Delivery

Pure Online Business:- Products/services are delivered digitally or through shipping.

Brick-and-click Business:- Customers can pick up items in-store or order online for delivery.

  1. Scalability

Pure Online Business:- Easier and quicker to scale globally.

Brick-and-click Business:- Expansion requires investment in physical locations.

  1. Examples of Services

Pure Online Business:- E-commerce, digital content, online courses, SaaS.

Brick-and-click Business:- Retail, restaurants, hybrid service providers (e.g., online order with in-store pickup).

  1. Convenience

Pure Online Business:- 24/7 availability from any location.

Brick-and-click Business:- Customers can choose between online shopping and in-store visits.

  1. Trust Factor

Pure Online Business:- Relies on online reviews and branding for trust.

Brick-and-click Business:- Physical presence builds customer trust through face-to-face interaction.

Tools for Promoting Websites in Online Business

  1. Search Engine Optimization (SEO)
    • Helps websites rank higher on search engines like Google.
    • Involves keyword research, backlink building, and on-page optimization.
  2. Pay-Per-Click Advertising (PPC)
    • Paid ads on Google Ads, Facebook Ads, and other platforms.
    • Drives targeted traffic quickly.
  3. Social Media Marketing
    • Promotes products on platforms like Facebook, Instagram, Twitter, LinkedIn, and TikTok.
    • Uses organic posts and paid promotions.
  4. Email Marketing
    • Engages customers with newsletters, promotions, and personalized offers.
    • Tools: Mailchimp, HubSpot, ConvertKit.
  5. Content Marketing
    • Blogs, videos, infographics, and ebooks to attract and engage customers.
    • Tools: WordPress, Medium, YouTube. What is the difference between pure online business and Brick-and-click business?
  6. Affiliate Marketing
    • Partners with influencers and bloggers to promote products.
    • Tools: Amazon Associates, ShareASale, CJ Affiliate.
  7. Influencer Marketing
    • Collaborating with social media influencers to promote the brand.
    • Platforms: Instagram, YouTube, TikTok. What is the difference between pure online business and Brick-and-click business?
  8. Online Marketplaces & Listings
    • Selling on platforms like Amazon, eBay, Etsy, and Google Shopping.
    • Improves visibility and sales.
  9. Web Push Notifications
    • Sends alerts to visitors even when they are not on the website.
    • Tools: OneSignal, PushEngage. What is the difference between pure online business and Brick-and-click business?
  10. Web Analytics & Tracking
  • Tracks user behavior to optimize marketing strategies.
  • Tools: Google Analytics, Hotjar, SEMrush. What is the difference between pure online business and Brick-and-click business?

A business that operates entirely online without any physical presence.

A business that has both an online and physical store presence. You can know the syllabus of E-commerce for Mcom-lV on the official website of Gndu.

Important questions of E-Commerce.

  1. Emerging Trends in E-Commerce
  2. E-Commerce Revenue Models

What is the difference between pure online business and Brick-and-click business?

emerging trends in e business

Elucidate various emerging trends in e-business which are dominating this entire market.

Meaning of E-Business:- E-Business (Electronic Business) refers to the use of digital technology and the internet to conduct business activities. It goes beyond just buying and selling online (e-commerce) and includes all aspects of running a business online, such as:

  • Online marketing and advertising
  • Electronic transactions and payments
  • Customer relationship management (CRM)
  • Supply chain management (SCM)
  • Online customer support and service

E-business is continuously evolving with advancements in technology, shifting consumer preferences, and new market dynamics. Here are some of the emerging trends shaping the e-business landscape today:

1. Artificial Intelligence (AI) and Machine Learning (ML) Integration

  • AI-driven chatbots and virtual assistants increase customer support.
  • Personalized recommendations are occured based on browsing history and preferences.
  • AI-powered fraud detection and predictive analytics. emerging trends in e business

2. Voice Commerce and Conversational AI

  • Growing use of smart speakers (Alexa, Google Assistant) for online shopping.
  • Voice search optimization for e-commerce platforms.
  • AI-driven voice assistants providing shopping recommendations.

3. Augmented Reality (AR) along with Virtual Reality (VR)

  • AR-enabled product previews (e.g., virtual try-on for fashion and eyewear).
  • VR-powered immersive shopping experiences.
  • Enhanced visualization of products before purchase. emerging trends in e business

4. Blockchain and Cryptocurrency Payments

  • Decentralized transactions ensuring security and transparency.
  • Acceptance of Bitcoin, Ethereum, and stablecoins for online payments.
  • Smart contracts for automated, trustless transactions.

5. Omnichannel Retailing

  • Seamless integration of online and offline shopping are experienced.
  • Use of physical stores as an example of fulfillment centers for online orders.
  • Cross-platform shopping (desktop, mobile, social media, voice assistants). emerging trends in e business

6. Subscription-Based and DTC (Direct-to-Consumer) Models

  • Brands bypassing traditional retail chains and selling directly to customers.
  • Subscription boxes for personalized product delivery (beauty, food, fashion).
  • Increased customer retention through recurring revenue models.

7. Social Commerce and Live Shopping

  • Shopping directly through social media platforms (Instagram, Facebook, TikTok).
  • Live-streamed product showcases with real-time purchasing options.
  • Influencer marketing integration to drive sales. emerging trends in e business

8. Hyper-Personalization with Big Data Analytics

  • Data-driven marketing strategies for individualized customer experiences.
  • Predictive analytics to anticipate buying behavior.
  • AI-driven email marketing and dynamic pricing strategies. emerging trends in e business

9. Mobile Commerce (M-Commerce) Expansion

  • Mobile-first shopping experiences with user-friendly apps.
  • One-click payments and digital wallets (Google Pay, Apple Pay).
  • Growth of Progressive Web Apps (PWAs) for seamless mobile browsing.

10. Sustainable and Ethical E-Commerce

  • Eco-friendly packaging and carbon-neutral shipping.
  • Ethical sourcing and transparency in supply chains.
  • Rise of second-hand and resale marketplaces. emerging trends in e business

11. Same-Day and Drone Deliveries

  • Faster delivery options with AI-driven logistics.
  • Use of drones and autonomous delivery vehicles.
  • Expansion of hyperlocal delivery services.

12. 5G and IoT-Driven Smart Shopping

  • Faster internet speeds enabling seamless ecommerce experiences.
  • IoT-powered smart devices automatically order essentials.
  • Enhanced connectivity for real-time inventory tracking. emerging trends in e business

Conclusion on Emerging Trends in E-Business

E-business continues to evolve rapidly due to advancements in technology, changing consumer behavior, and the increasing need for businesses to operate in a digital-first environment. Emerging trends such as artificial intelligence (AI), blockchain, personalization, omnichannel strategies, and the rise of social commerce are reshaping how businesses interact with customers.

Moreover, the growing importance of cybersecurity, sustainability, and data-driven decision-making is influencing how companies manage their online operations. Businesses that adopt these trends early are more likely to remain competitive and meet evolving consumer expectations.

In conclusion, e-business is set to become more customer-centric, secure, and efficient as digital innovations continue to emerge. Companies must stay agile, embrace new technologies, and refine their strategies to succeed in this dynamic digital marketplace.

The e-business landscape is undergoing rapid transformations with AI, AR/VR, blockchain, and hyper-personalization at the forefront. Businesses must adapt to these emerging trends to stay competitive and meet evolving consumer expectations. You can check the E-Commerce syllabus for Mcom-lV under gndu on the official website of GNDU.

Important questions of E-Commerce

  1. Features and Importance of Ecommerce
  2. Revenue Models of E-Commerce
  3. Advantages and Disadvantages of e payment of gateways.

emerging trends in e business

E-Commerce Revenue Models

Explain various types of Revenue models of e-commerce. Are they really effective in present times?

E-commerce revenue models are different ways in which online businesses generate income. They vary based on the nature of the business and the type of transaction taking place. Here are several common e-commerce revenue models:

1. Business to Consumer (B2C)

  • Description: This is the most common model, where businesses sell products or services directly to consumers. Examples include online stores like Amazon, Alibaba, or Walmart.
  • Revenue Generation: The revenue comes from direct sales of physical or digital products.
  • Effectiveness: Extremely effective, especially with the growth of online shopping and the increasing consumer preference for convenience. E-Commerce revenue models

2. Business to Business (B2B)

  • Description: In this model, businesses sell products or services to other businesses. Platforms like Alibaba and ThomasNet are popular examples.
  • Revenue Generation: The revenue is generated through bulk sales, recurring orders, and long-term contracts.
  • Effectiveness: Still highly effective, particularly in industries like wholesale, manufacturing, and supply chain management.

3. Consumer to Consumer (C2C)

  • Description: This model allows consumers to sell directly to other consumers, often via platforms like eBay, Craigslist, and Poshmark.
  • Revenue Generation: The platform charges transaction fees, listing fees, or premium services to make money.
  • Effectiveness: It continues to thrive, driven by the growing popularity of second-hand goods and peer-to-peer sales. E-Commerce revenue models

4. Subscription-Based Model

  • Description: Businesses offer products or services on a subscription basis, like Netflix, Spotify, or subscription box services (e.g., Dollar Shave Club).
  • Revenue Generation: Revenue is generated through recurring subscription payments from customers, typically on a monthly or annual basis.
  • Effectiveness: Very effective in today’s market as consumers prefer convenience and predictability. Subscription models are also great for businesses to ensure steady cash flow.

5. Freemium Model

  • Description: This model involves offering basic services for free while charging for premium features or services. Examples include LinkedIn, Dropbox, and various mobile apps.
  • Revenue Generation: Revenue comes from the users who opt to pay for additional features or services.
  • Effectiveness: This model is still very effective, especially in the tech and digital space, as it lowers the barrier for entry and attracts a large user base. E-Commerce revenue models

6. Marketplace Model

  • Description: A platform acts as an intermediary between buyers and sellers, earning commissions on sales made through their platform. Examples include Amazon Marketplace, Etsy, and Airbnb.
  • Revenue Generation: The platform generates revenue by charging a fee or commission on each transaction made between buyers and sellers.
  • Effectiveness: Extremely effective in today’s digital landscape due to the network effect. Marketplaces scale well and benefit from having large numbers of third-party sellers.

7. Affiliate Marketing

  • Description: This model involves earning commissions by promoting third-party products or services. Websites or influencers, for instance, use affiliate links to refer customers to other businesses.
  • Revenue Generation: Affiliates earn a commission when a referred customer makes a purchase.
  • Effectiveness: Highly effective, especially with the rise of influencer marketing and content creators who generate passive income by recommending products to their audience.

8. Advertising Revenue Model

  • Description: E-commerce businesses provide free content or services and monetize them through ads. Google, Facebook, and YouTube are key players using this model.
  • Revenue Generation: Revenue is generated from advertisers paying to display their ads on a website or app.
  • Effectiveness: Very effective in today’s digital world, especially with the immense growth of digital advertising and targeted ads.

9. Crowdsourcing Model

  • Description: In this model, a business solicits funds, services, or products from a large group of people, often via platforms like Kickstarter or Indiegogo.
  • Revenue Generation: Revenue comes from individuals or backers who pledge money to support a project, product, or service.
  • Effectiveness: Highly effective for new product launches or innovative business ideas, though it can be risky and uncertain. E-Commerce revenue models

10. Drop Shipping

  • Description: A retailer sells products to customers without holding any inventory. When a customer places an order, the retailer forwards the order to a supplier or manufacturer who ships the product directly.
  • Revenue Generation: The retailer earns revenue from the difference between the price at which they sell the product and the price paid to the supplier.
  • Effectiveness: This model is effective for entrepreneurs with limited capital as they don’t need to invest in inventory, though it’s highly competitive. E-Commerce revenue models

Are They Effective in Present Times?

Yes, these revenue models are generally still highly effective, but their effectiveness can vary depending on market conditions, industry, and specific business strategies. The digitalization of commerce and the shift towards online shopping continue to create new opportunities for many of these models.

  • B2C and B2B are still the most widely used and are growing as more people shop online and businesses embrace digital transformation.
  • Subscription-based and freemium models are thriving due to the increasing preference for services that offer convenience and personalization.
  • Marketplaces have become giants, especially in the e-commerce space, because they aggregate both supply and demand, creating a powerful network effect.
  • Affiliate marketing continues to be effective due to the growth of influencer marketing and digital content creation.
  • Advertising is still a dominant revenue model, with the rise of digital ads and social media platforms providing lucrative opportunities for businesses to monetize their audience. E-Commerce revenue models

However, competition is fierce, and businesses must continually innovate, optimize user experience, and adapt to changes in consumer behavior to maintain relevance and profitability. The key to success lies in how well a business executes and adapts its chosen revenue model. You can check the syllabus of E-Commerce of Mcom-lV on the official website of gndu.

Important questions of E-Commerce

  1. Features and Importance of E-Commerce.
  2. Models of E-Commerce.
  3. Advantages and disadvantages of E payment gateways.

E-Commerce Revenue Models

law of Returns to Scale

Explain the law of Returns to Scale. Explain the reasons for returning to scale.

Ans:- Meaning of law of return to scale- Return to scale describes the changes in production due to the all input units are varied by the same proportion.

Definition of return to scale:- “The Return to scale refers to changes in total output as a result of changes in total input factor by the same proportion. Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased in the manufacturing, then output increases at a higher rate. It means if all inputs are doubled, The, output will also increase at a faster rate than double. Hence, it is said to be increasing returns to scale.

In other words:- Law of return to scale refers to increase in output as a result of increase in all factors of production in the same proportion. Such an increase in output is known as Return to scale. It is a long run concept. law of Returns to Scale

Production function

P= f ( L, K )

L= Labour K= capital

If both the factors of production i.e labour ( L) and capital (K) are increased in the same proportion (m) then production function will be written as:

P= f ( ml, mk )

There are three aspect of Return to scale

  1. Increasing Return to Scale
  2. Constant Return to Scale
  3. Diminishing Return to Scale

1.Increasing Return to Scale:- When all factors of inputs are increased causes greater increase in output than input increase. Understand with the following figure.

Then increasing returns to scale occurred. The above Figure Shows that a 10% increase in all factor inputs causes a 15% increase in output. Again 15% increase in all factor increase causes 25% increase in output. Thus, any percentage increase in all input factors is causing a greater percentage increase in output. By gndupapers.online law of Returns to Scale

  • Causes of Increasing Return to Scale

There are two types of Causes

  • Internal causes
  • External Causes

Internal Causes

  • Internal Causes
  1. Real Economies:- It deals with the reduction in the physical quantity of inputs due to labour skills, labour specialisation and labour division. law of Returns to Scale
  2. Inventory Economies:- A big enterprise enjoys inventory economies. Because they purchase a large stock as a result of which they get a discount. When the raw material is scarce in the market and then they sell at the highest price. The firm has no need to worry at all. So they get an increasing return.
  3. Managerial Economies:- A firm produces efficient and talented managers by using advanced machines. Thus all production will be increased due to decentralised work of the firm. law of Returns to Scale
  4. Transport and Storage Economies:- A big firm has its own trucks which carry its raw material and finished production carrying to the market. Transport and storage help it to sell its products at favourable prices. law of Returns to Scale

External Economies.

  1. Real Economies:- These firms are shared in by a number of firms and industry. These external economies include managerial techniques, Developed financial areas and roads. And some projects are shares and jointly operated by their experts employees.
  2. Economies of information:- Developed system of communication of a country will be helpful in increasing return in production.  law of Returns to Scale

2. Constant Return to Scale

Constant Return to Scale occurs when a percentage increase in all factors of input increase causes the same increase in output.

Above figure shows that a 10% increase in all factors of inputs causes a 10% increase in output. Again 20% increase in inputs causes 20% increase in output. Therefore, any percentage increase in inputs matched with an equal percentage increase in output is called constant return.

Causes of Constant Return to scale

( I ) Economies of scale give rise to increasing return to scale.

( II ) Diseconomies of scale lead to Decreasing Return to Scale.

( III ) This constant Return to Scale exists after the phase of increasing return to scale exhausts itself and before the phase of Decreasing return to scale sets in. Means when all skills and advancement of machines are exhausted. Due to which products return remains constant.

( IV ) Constant Return to Scale arises when economies are exactly balanced by Diseconomies. law of Returns to Scale

3. Diminishing Return to Scale:- Diminishing Return to Scale occurs when a percentage increase in all factors of inputs causes a lesser increase in output. As 15% increase in all factors of inputs causes only 10% increase in output.

Above figure shows that 15% increase in all factor inputs causes only 10% increase in output. Again 25% increase in factor inputs causes 16.50% increase in output. Thus, Return to scale is thus diminishing.

  • Causes of Diminishing Return to Scale
  1. External Diseconomies
  2. External Diseconomies

( 1 ) Unwieldy Management :- At the biggest firm management is difficult to carry out its managed functions. It becomes difficult to supervise the work spread all over the firm. Due to which proper control is not possible in the business and as a result of which return is decreased. law of Returns to Scale

( 2 ) Technical Difficulties:- At certain points technical improvement can be carried out. But after that it becomes difficult to improve on it. Which becomes in economies causes Diseconomies of scale. And returns also declined in the firm.

B. External Diseconomies

( I ) These Diseconomies are suffered by all firms. When the area of a firm expands beyond the limit then firms operating in that industry suffer external Diseconomies. Example:- Firms experience great difficulties in procuring raw material. Because of the large demand for raw materials, it has become scarce and expensive.

Cost of land for the new firms becomes prohibitive.

A Brief Of Law of Returns To Scale

Return To Scale Involves

Change In All factors of production in the same proportion

Law of Returns Always Long Run Analysis

Non-homogeneous production Function

Conclusion :- Now we can understand the scale of Return in the production. Which passes through three stages. As increasing, diminishing and constant phases of return. We can also understand its causes due to which they occurred in the business.

You can enjoy love poetry on the way to study. law of Returns to Scale

Essential question of business economics which you must learn.

  1. What is the definition of national income? Explain the different methods for the measuring of National income or gross product.
  2. What are the different problems in measurement of national income in underdeveloped countries like India? Explain.
  3. How is the price and output of a firm and industry determined under perfect competition?
  4. Elaborate upon the meaning and features of monopolistic competition. How is the output and price determination under monopolistic competition?
  5. Explain in detail the Law of Variable Proportions. Give its causes

Break Even Analysis

Break Even Analysis

Meaning of Break-Even Point

The Break-Even Point (BEP) is the level of sales at which a business’s total revenue equals total costs, resulting in neither profit nor loss. It represents the minimum sales volume required to cover all fixed and variable costs.

At the break-even point:

  • Total Revenue = Total Costs (Fixed + Variable Costs)
  • Profit = 0 (No Profit, No Loss)

It is a crucial financial metric that helps businesses understand the sales needed to become profitable and make informed decisions about pricing, production, and cost management.

Break-Even Point (BEP) Definition

The Break-Even Point (BEP) is the level of sales at which total revenue equals total costs, resulting in no profit and no loss. It is the point where a business covers all its fixed and variable costs.

Formula for Break-Even Point

  1. In Units:
    BEP (Units) =Fixed Costs/Selling Price per Unit−Variable Cost per

BEP (Units)= Fixed Costs\Selling Price per Unit -Variable Cost per Unit

  1. In Sales Revenue:
    BEP (Sales)=Fixed Costs/Contribution per unit × Selling price per unit


BEP ( For Sales ) = Total Fixed Cost/P/v Ratio

Importance of Break-Even Point

  • Helps businesses determine the minimum sales needed to avoid losses.
  • Assists in pricing decisions and cost control strategies.
  • Useful for financial planning and setting profit targets.
  • Helps in assessing the risk level of a business.

In summary, the break-even point is a crucial financial metric that helps businesses understand when they will start making a profit.

Assumptions of Break-Even Analysis

Break-even analysis is based on several key assumptions, which simplify the calculation and interpretation of results:

  1. Fixed Costs Remain Constant – Fixed costs do not change with production levels within a given period.
  2. Variable Costs are Proportional to Output – Variable costs per unit remain constant, meaning total variable costs change in direct proportion to production.
  3. Selling Price per Unit is Constant – The price of the product remains unchanged regardless of the quantity sold.
  4. All Output is Sold – It assumes that whatever is produced is sold, with no leftover inventory.
  5. Production Efficiency Remains the Same – No changes in technology, labor productivity, or efficiency are considered.
  6. Costs can be Clearly Separated – Costs are classified into fixed and variable components without any ambiguity.
  7. Single Product or Constant Product Mix – Either a single product is analyzed, or the product mix remains unchanged.
  8. External Factors Remain Stable – It assumes no significant changes in market conditions, government policies, or economic factors.

While break-even analysis is a useful tool, its assumptions may not always hold in real-world scenarios. Businesses should use it alongside other financial and market analysis tools for better decision-making. Break-even analysis 

Advantages of Break-Even Point Analysis

  1. Helps in Profit Planning – Determines the minimum sales required to cover costs and achieve profitability.
  2. Aids in Pricing Decisions – Assists in setting the right selling price by analyzing cost structures.
  3. Cost Control – Identifies fixed and variable costs, helping businesses reduce unnecessary expenses.
  4. Decision-Making Tool – Helps management decide on production levels, new investments, and expansion plans.
  5. Risk Assessment – Evaluates the financial stability of a business and its ability to handle losses.
  6. Determines Sales Targets – Helps in setting achievable sales goals to ensure profitability.
  7. Supports Financial Planning – Assists in budgeting and forecasting future performance.
  8. Useful for Investors and Lenders – Provides insights into the business’s financial health, influencing investment and loan decisions.

Overall, break-even analysis is a valuable tool for businesses to make informed financial and operational decisions.

Conclusion on Break-Even Point

The break-even point is a crucial financial tool that helps businesses determine the minimum sales required to cover costs and avoid losses. It provides valuable insights for pricing strategies, cost control, and financial planning. By understanding the break-even point, businesses can set realistic sales targets, assess financial risks, and make informed decisions regarding production and expansion.

Overall, break-even analysis is essential for ensuring profitability, improving efficiency, and achieving long-term business success. You can check the syllabus of Cost Accounting on the official website of Gndu.

Important questions of Cost Accounting 
Need for Cost Accounting 
Break-Even Analysis