Law of variable proportion explains the relation between the proportion of fixed and variable inputs on one hand and output on the other. When the firm increases its output by employing more of the units of the variable factor it changes the ratio between fixed and variable factors. The law speaks about three stages of production

1st Stage - It goes from origin to the point where the average output is maximum. When a firm increases the output by increasing the quantity of variable factors in proportion to fixed factors it moves towards optimum combination factors of production at this stage the marginal input increases that is the total output increases at an increasing rate it is the stage where the law of increasing returns operates. The marginal output begins to fall at this stage and the law of diminishing distance is introduced.

2nd stage - It starts from the point where the average output is maximum and goes to the point where the marginal output is zero. Once the optimum combination of fixed inputs and variable inputs is attained after that if the firm increases the quantity of variable output the per unit output of variable input that is average input will fall. In this stage, the total output rises but at a diminishing rate. This is a crucial stage for a firm because in this stage the firm determines its level of actual production.

3rd stage - It covers the range over which the marginal output is negative. It is also known as the stage of negative returns. In this stage, the total output begins to fall. Thus the total output, average output, and marginal output all fall. No producer operates at this stage even if he can procure the variable factors for zero price.

Let’s understand it with help of following table and graph –