RETURNS TO FACTORS
Returns to factors are also called factor productivities. Productivity is the ratio of output to the input. Factor productivity refers to the short-run relationship of input and output. The productivity of one unit of a factor of production will be equal to the output it can generate. The productivity of a particular factor is measured with the assumption that the other factors are not changed or remain unchanged. Only that particular factor under study is changed.
Returns to factors refer to the output or return generated as a result of change in one or more factors, keeping the other factors unchanged. Given a percentage of increase or decrease in a particular factor such as labour, is it yielding proportionate increase or decrease in production? This is analysed in 'returns to factors.'
The change in productivity can be measured in terms of
(a) Total productivity The total output generated at varied levels of input of a particular factor (while other factors remain constant), is called total physical product.
(b) Average productivity The total physical product divided by the number units of that particular factor used yields average productivity.
(c) Marginal productivity The marginal physical product is the additional output generated by adding an additional unit of the factor under study, keeping the other factors constant.
The total physical product increases along with an increase in the inputs. However, the rate of increase is varied, not constant. The total physical product at first increases at an increasing rate because of the law of increasing return to scale, and later its rate of increase declines because of the law of decreasing returns to scale.