This law is related to short-run production function. This law examines production function keeping one factor as fixed and other factors as variable.

According to this law, if units of variable factor arc employed keeping one factor as fixed, production increases upto a limit and after that it starts declin­ing.

Applying units of variable factor to the units of fixed factors, the factor proportion changes and, therefore, because of this law is called ‘law of variable proportions’. In real life a firm remains operative in the stage of declining output and, therefore, this law is regarded as an improved form of the law of diminishing returns.