General Theory of Factor Pricing
- 1. Topic ::General Theory of Factor Pricing
- 2. Topics that will be discussed: 1.Significance 0f factor pricing 2.Role of factor prices 3.Meaning of distribution 4.Marginal productivity theory
- 3. Significance of factor pricing: The price at which the means of production(that land,labour,capital) are sold.Classical econmist argue that factor price represent the intrinsic value of the means of production. Importance of factor pricing: Factor prices serve as a rationig device for the utilization of the productive resources.These resources are allocated among various industries and firms throught the mechanism of factor prices and these prices facilitate the shitrting of resources from the less remunarative uses to the more profitable ones.Dynamic society can't function without this shitrting.
- 4. Role of Factor Prices: The factor prices play a key role in the free enterprise economy. a) It is Through factor prices the employment level of various productive resources are determined. b)The second important function of factor prices is to allocate the productive resources among the various alternatives uses.The resources from the less important to the more important uses. c)The factor price not only guide the individual frims.They also brings about the most efficient allocation at the resources of the community. d)Since we all are suppliers of one resources factor pricing determines the incomes of all us.Our respective share in the national output.
- 5. Marginal Productivity Theory: Marginal productivity theory contribute a significant role in factor pricing.It is a classical theory of factor pricing that was advocated by a German economist in 1826. • According to this theory,under perfect competition.the prices of seruies redered by a factor of production is equal to it's Marginal productivity.
- 7. PRICE FACTOR Equilibrium point price is called factor price. So, If we want to know price factor, at first know what is Equilibrium?? There,,,price paid by businessman to the various factor of production in the form of rent,wages,interest etc are a major determinant of money incomes.
- 8. Determination of a factor price
- 9. Equilibrium under perfect Competetion::::: Two condition must be satisfied,viz:: 1). MRP=MFC 2) MRP curve must cut the MFC curve from above.
- 11. Profit or Loss Under Perfect Competition Market
- 12. Modern Theory Of Distribution THE MODERN THEORY OF FACTOR PRICE WHICH PROVIDES A SATISFACTORY EXPLANATION OF FACTOR PRICES IS THE DEMAND AND SUPPLY THEORY.WE SHALL NOW ANALYSE THESE TWO ASPECTS DEMAND & SUPPLY.THE PRICE OF A COMMODITY IS DETERMINED BY THE DEMAND FOR, AND SUPPLY OF, AA COMMODITY, SIMILARLY THE PRICE OF A PRODUCTIVE SERVICE ALSO IS DETERMINED BY DEMAND FOR, AND SUPPLY OF,THAT PARTICULAR FACTOR.WE SHALL NOW ANALYSE THESE TWO ASPECTS, I.E DEMAND & SUPPLY.
- 13. Demand Side About the factor demand we should remember two things : (a) Demand for a factor is not a direct demand but it is an indirect demand (b) The demand for it is a jointly interdependent demand.
- 14. Demand for a Factor
- 15. Supply Side The supply curve of a factor of production depends on various conditions governing its supply. The supply a general rule that if the price of factor increases, its supply also increase.
- 16. Value: The price of a product and distribution determines the share of the factors of production in the national output. Theory of Distribution: Distribution theory states that input to production-whether capital or labour-will continue to be added until the value of it's marginal product(the revenue or yield resulting from the input) is equal to the cost of the input.That is,the reward of a factor of production is determined by it's marginal productivity.
- 17. • The value of the marginal product of a factor depends on the value of the product that it produces.obviously,higher the price of the product,the higher will be the value of the marginal product of the factor that produces it,Greater will be it's reward or the income.
- 18. Theory of Production: • Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use, or exchange in a market economy. production is measured as a “rate of output per period of time”. • In theory of distribution, determines the share that goes to a factor of production out of the national output. It can be easily seen that the greater the share of a factor of production, the better will be his standard of living and greater his efficiency in production . The more efficient the factors of production, the higher will be the national income.
- 19. Transfer Earnings Amount of money that a factor of production (capital ,labur,land) must earn to prevent being transferred from its present employment to another . In Benham 's words ,"The amount of money which any particular unit could earn in its best paid alternative use is sometimes called its transfer earnings ".
- 20. Equity in Income Distribution Equity in the distribution of income means that the distribution is fair and just ,and is more concerned with equal opportunities rather than equality in the distribution of income . Income inequality refers to the extent to which income is distributed in an uneven manner among a population .
- 21. Remedies There are two broad remedies : (a) Via Administered Prices (b) Via Resources Redistribution
- 22. Topics : 1. Production exhaustion problem or adding up – problem. 2. Impact on technological progress on relative factor shares.
- 23. S W O Y M MP XL Amount of Labur Marginalproductivityoflabour 1. Production exhaustion problem or adding up – problem. a MP Y T R O K X N b Amount of capital Marginalproductivityofcapital Figure : A Figure : B Interest Interest Wage bill Wage bill