the Theory of factor Pricing i produce ov the oie is divided among tee clases Of the community, viz. the proprietor °F | ee ouiioied. we of capital necessary for its cultivation and the labourers by whose | is is cultt ted. To determine the laws which regulate the distribution ts the principal | problem in Political Economy. | David Ricardo | ‘The sales plan of a business firm is followed by a purchase plan. And in the factor (input) market the business firm is a buyer and the household is a seller. However, there is no direct demand for an input or a factor of production. A firm’s input demand is derived from the underlying demand for the community which it produces. In other words, the demand for ayy factor of production is derived from the demand for the good it produces. In the words of Walter Nicholson, “Profit-maximising firms play the role of intermediary in bringing together individuals’ demand for economic goods with input suppliers’ abilities to produce those goods — if no one wants a good, firms will not hire anyone to produce it"? As with commodity pricing, factor pricing depends on how suppliers and demanders are organised. There is a fundamental difference between commodity pricing and factor pricing. However, we find the following correspondence between output market and input (labour Labour Input Derived from production conditions Derived from preferences of workers Any discussion icing starts with labour — the human factor of production. is not as a + are different types of labour with different skills (tr ng skills), These ne are not certa inly interchangeable. Yet we talk about the wage rate ' Wiceconamia Theory (Harcourt Tp, 3000. p- 63 739poo +. pe of Our Study cre te FS" iN nde ro or sackets — thal we aa Og ate we markets Cn Ch, 26). nya OM Tet ‘Sao Baer? tion Vs. Personal Distribution ss tonal DAO gow 0 NBS AOU the ext 0282 Fan tt i ae Sg ss te ache py — eA a PEE Te my ce ean we enon — en Fo her fae ta ak acc eon Se sas wp of capital go0dS (Plat, equipment ge at SG oan ME. pe me pmol dara ee 15 3s3 Profit Masiisaton and Derived Demand aa ne rie cio ey ante 0 i mat noe tees tween ol ven A) and tl S(O. Am mf facts wed (4, capital Ky and labour) i = RK 1) OK 1) “sy te Estos dion for profit maxiisaion sre a ea ac Leo % aa R q : ax = ax aL * i nus sg atany ptt maximising fim sould ie aoe fer psi phe gaia which the extra revenue sided 8) Hi #8 i egal he ets cos of ising tha unit 9.254 Marginal Revenue Product nt ‘gilt Sng nme wih spect toa change in factor me 60H Ege ‘role (MR) fr tt factor. The hiring of an extra unit ET pein und ant “oe faa RT Fac” on “Tw Twos oF Bacron Peo © 741 2 he outta) pmetes. caue of howe, for example “ = SRD _ atta) 0 Ue = i = wasn, “ eit he marginal enue fr he ms output and MPP, she argon physical ses ao Lets suppose at cen mo eer Rng aes att fr aur ysl 3 extra unis of cutpat an th marginal revenue earned from selling # wit om wiput in RS. 4. pee is aes made by the firm from hiring an extra hour of (ef time would be Rs. 12 — thet isthe MRP, = Rs 2. The sume concept relevant arr for of prodeston ‘aston: The MRP from rns ax xr wa of an fara extra revere yee psa ha eta ara pre's fan yang theft arg seen! He argo recent oe fet he ate! ipods it MRP = Mer | 0.25.5 Marginal (Factor) Cost ‘Eqaton (2) shows that aa addons unit of fear shouldbe employed vp tothe point uhh ts MRP is equal tothe additional cost of heing hat wt IF te supply curves facings Stee for he factors 1 hires are completely clastic st prevaling prices (hats ifthe fem (Sei at wants witht afecting pat pies), hi exza costs simply the market prices ‘Foke factors Uf 3 Firm ean hire any number of workers at a market wage of Rs, 10 per tou then the marginal cost of bring labour is this market wage. tn this case the Bam con FPoubly employ the worker since his MRP, (Rs. 12) exceeds tis market wage. Uf factor Seriy is not infinitely elastic, however 3 firs Actor purchase decision is likely to have fone effet on factor prices. In this eave, the mirginal cost of purchasing another unit of ‘ctr wil exceed its make pice because the firm's hing will raise factor prices. For fetine being we do not consider thie possibilty and assume instead that the firm is a price Biter in the factor markets That i ac, ar Faw © ‘here rand» ave interest rte (te price of cept) ond wage rage ihe price of labour). ‘spectively, The first-order conditions for profit maximisation, therefore, are RP, =r and MRP, = w a ay, we get by diving both sides of equation by he marginal prodoet Sine this MRP, ot boa Ma = wAtPP, a Since MPP, ease aon] pu per wi of input, the right hand side of equation (7) measures the marginal cost of un aditional unit of output (wage rate multiplied by the lar necded ts prods one unt font) Equation (7 shows that both the hiring. and atc ae as flo the sane rl puts outputs are chosen 0 hat marginalSir pence tle ve Derivation (2 256 Am Alternatyy ave deinuion ofthe Prof maxing coy, | ray mow pret EEN To he relationship betwen the yr ty son (em fet used in Ch. 17, we era Ae | oy sar inte ey fH cont of prodigy lvl of ae a eal 2 nen ote The Lamia ON pe K+ wb + My 2K 2 son etn. Assuming that the fem ein go tee 1 9 re a rad we Bode conditions for 3 inoue Maro x | Mow a3 =o a AM gy 9K = 0 ‘he fat wo ofthese equations can be writen a8 x ad a amr, 0 x aE = urn, = Bat 8 we have aed in Cb 17, he Lagrangian multiplies, 2. can be ite magia ost (MC) bncase teleost change inthe objective (total cos) fru at hate in the coat So we Rave A MCMPR, = kt usa hie can ow be ntnported int this theory fr input eho BY (he = MC etx poit manimioaion ¢ MRMPP, = MRP y= r a) MRMPP, = MRP, = w hich isthe sume - no re th Se suk we deve caler (equation 7). This approach Win Hog “Tw Turon oF Faeton Peso © 743 4 cm i plc aK In the cup ht, - a tat AS ete ation MF ® PPP, = 100 YP wy a PMPP, = wc Vth, = w or 4? isthe marginal vale pod. Tis ose telram when teeta comuibton Noe unt i valued at make price = donee, thee is mops oc imperon athe comma mashts a fms ae sexys ers MR. nthe MRP VP Babee oe el sume ta oe om {ees SoH Is nt nce 6 moles atin tetcen MAP nd VP, 9.258 The Demand for a Single Input Hse we ose the profitmaximisingassmrion to study the comparative satis of input mani To be specif, we shall ook a the dam for labour and ask about the direction indsieof Le. This derivative is likely to be negative (a decrease in w wil eause more our t be hired). ‘Te main reason for BL/ Ow tobe negtve is tht the marginal physical produc of lbour sininshes a the quality of labour employed increases (Ube quantity ofthe other coe iat ‘Ne maining the same). A dereae in w means tht more labour ust be hited to ring ‘Sut the equality = PMP, =A fallin w must be met by 2 fallin MPP, (remaining ‘et and this can be Brought about By incesing This poi may be eoved as follows Proof; The total diferenal ofthe profit-maximising equation (13) is a a 1 oe * FaMPA TAL ve assume that @N4PP, 0L-<0 (at is, MPR, diminishes as 1 ine hea as) cs 1 fal ine ceteris pars, wil cause more Isbour (he single variable fir) 10 be Ahead (hired) sod tis in is tr, wel caNH6 more output to be produced, “he ating Part of the VMP, Curve as the Demand Curve for Labour Meta ran ek ry acl po maxing Gms wl ire nits of the variable factor ven om Ch 17 at cv fhe fare the marina revenue hat— a em tai rcs kA Mary gS. yee een rs aan Mg prea Oy tbe DEL ye taxte — abOt ah one Hed fac wena one ue ruts of the Lou ae ee ey uboor the vil M Wome ean cUTVE (or a factory 0 me tu ETE 18 Blow he ee explained 2 e101 POE tae cine woe oS ATT pas ut LTH spa EN ; st et Pelon int aera Se Tee wove My SU A he ge my eee by ARP) would be lst than ihe wae ety a nae ae i not wena Pee Shes ith motto ea ee tonne any worker: In ther Wo a fim could pay and shill cover a Femur fact poe that 2 6 its sabe con 2 er tin ly the dowmaTIOBIN — 00 he vpn ‘Fare at bath (poi) and Ly (paint a Bee ey Soe an pl 5 the Re ee asta pic? For e7 Setotinarthts redop 0, MRPIS Iss he wage ate. oer was ech ni SMiitar a Soman testo rence a8 (ici Thess pote rmnimsng fn would fe benerat ted 20 ws thr an qantsForevey et labour ro tL Aap exces be wage Tou.» fi wee hg by ws ou fd ach Tent ut fond up of) word ii Pore, wbec MRPs sing ube heals he tage rue 3 pl of min profit Tot Imtinon pt fem port ¢ wo i rove is profitably by moving im either di ‘rection — to hiring zero workers or to hiring {workers Hes sbeuer thon ery, because at re semen | Fig 25:1: Demand for a Fatt ‘Marginal Revenue Polit at hat quantity ARP exceeds the wage rate Only Inere MAP cuts the wage EE 1e Only points where MA? cul sbove tht whe MRPs downward sloping. are posible pofit-muxinisiné in acl it arial revenue padct depends on two factors : (1) the physic ors a tps hs sco nit of te viable factor makes posible. lil incre eee ned tat exact, The it ofthese 1 called ial ode MP; the Second of these called marginal seven SU MRO = S0rP 4 san time ote trig © 8 isl MENG 9 OMSL at Meth MP carve td sr freuen mca 1 ei cnt nr enna ay te to th ee ema ee Pe AE cad eee ing magia productivity tet 1H, ies MA 8 wae a Sn be te 259 The Demand fora Factor (ln Cate of Severs Variable Pastors) tneweof seg variable itor (cha ibe he alu of he maria pot aetna rvs ded ae ofthe fat Ben mrt te oer ae ire involved inthe production proces te VtP sve of labor nts demand is is Because varius resources are wed simultaneously inthe roduc of pds. se page It the pie of one ar esta change in tn epee tne ot he oher> SoaGee 15 Cu, his the MPP cure of low when he wape ve taaly lls. “fee eects of fall in factor price The change (al) ote wage re asm general thee fle ebseation fle. an aap expansion (le) effec and po-msxsmaation eect The fint wo effects Ae Sinan i F252. Tes suppose thet nay the frm produces the pofi-maximising tpt Q, with he combination ef fot Ky, fen the nial factor pices 7, adm, whose rao defines ison: of the ioeos ne AB Now the wage seas toy andthe new foot ine AC. ‘ein, oving the sare Bade, ca8 Row proce the Higher outgu denote. by the [want Qs sine Ke ad fants of eal and liar respectively, as shown by goin Fhe fangesy of new soso line AC with the higher stant Oy 116 2 Substitution effet und sae effect The movement fom E to F can be divided io wo separate elects: 39 inp sabsitation ‘fect and an output expansion (sae fet. To “pute the two effects we draw an Boca line ANC) purallel tothe new one (AC) 50 that lets he new fgetae pie rato, ba tangs the old ioquant Q, Now tangency SEU at att E: The movement from £0 # consites fe input substnaon effets the Br substates the cheaper labour for the relatively more Store cpa ene prodcig ese lvl of expt QS he employsent of taboar items ee tee Mower the fm wil bo tay af sl Eon the sane soguant Soe a Meee ese de catty oreo boa ie “Sa ae factas Consequchly the firm can produce the higher level of ‘St G+ yng io of eal an wif lator The nea of employment fom ite gw a monewent hom & 49 Fs the cpt expansion effect sh be dm sap AARts ot oh ie However pois Fm mt dace the Ache alin he wage rae a6 ‘pat of te perfectly come sua ol ive 1 equiibawm of the Fn, The reason C ere theft al cq iin 26S pod oir pe se downward 10M and the pg eX ine 0 Oy THA resus on i ey Ts wl lead 108 peal resale CBOs 2 Fa equilibrium ofthe fem wi reas ts profit et es a, fin ieacost Tne 1 ACPO FE 2 vie the isoquant Q, denoting 4 gna ay oh ven a me « sarang level of opt (ret G Fp 288 Out Exgunon “Thus we sect smtancous operation of bth pull and push forces. Heve these din of «decree fe wage ae cases afl (quay of cape! to neck with, However pat” expunsce ead prot-mximintion Mls pete reat in an irae in the thage of bots ampas. Thos thet effets togeter caus he MPP, curve to sft upward tothe night In poner the tp and profi maximising elec tgetier move than offset the susttuion et that he ed eet of 2 Gall the wage rae is 3 att of the MPP, cure tthe right Gven the fed pice of the final comma. Pte IMP, curve sito the ‘igh when seen anal facto ate wed in the prolcton proces The shit shone in Fig. 255. The new equilibrium demand for labour is denoted by point F on vg if we Fig. 254 Profi masiming la inthe MP?,, because labour hs» wt ™, & Fr is ”, \ \ wwe, | me, ro = eat ut ca genera seis of points sch fr «der core fr iat when several on ‘qurve for labour when several vari eee cae sHsp a ate a iy seg brats lee. ec Sree hone mo seig ean of trove a hme mt ce ‘ae mre den oe {Re dra cre fo bow taf aed wd he mat salt ae fer ioe Howes mr oa See oat oak sesamin of wth Sonal ceo ti To Tass ena oe raya he ir tans ngs ese pb oper nage re etc: fa of pnoe ot See sa apes ot a iro to make soft he frm ep ang Wee ak free mers Sree is te ta Goes ory sree coe mand ae nly cave saa ei adeg wee ws pcre pees et Sar potoa compen va Pls otal ate aha ae Oe w (orem WT open fg, 256 Demand fr Labour + Sige Fim st or he Mak 6 wich isthe demand curve for bout ofan inka fem sb the Nf 256 ay isthe nid o's ema carve fer bow shows hat whew te wage ss Whe tom cnt com ts mand clea cps [ai of abow Smming et all Yims, we aire at the wtal demand for labour at the wage rate W, Point E in FE 1S6 cy is ane punt on he marks Seman cure (labor Now lees saree gee aso W, Cer pars he fm would be moving Loe ee pan sri he wage of bout Wy But 2 fall “tree of te pdt he MP, ao (oo vel of employment an all he VP,conse an Mi ROBINS as 9 Asan 7 OA Se of ims 8) ANA AON Iggy ae ein SH fate, “were a Seat nos Mt PON eH dea ns nc ae ot pil FN mrt dng Srunang oniot SFO at en MO SSOUNL We Hou thee nthe she i Pain he wage rate. In Fi, 25.6), the demand for abou bw A chen the pre of the product te ean Ro pas ts poi doesnot Blong However, wher | “— the fa i ing on hy n emia seg bia eh Sen 2 ee care ia ee ps a oh a ap a Sg eel ea Spratt te pte airy Ma Poca oe a cane are setae ae rtm Oe a none pea Sea rn a Sipe fs Sic elo. The An iorset rcaaues the depree he enge caters paribus. Tere we four determinunt Of elasticity of demand fr ‘cancep inthe theory of wages isthe elasticity of demand fr ib} wstresponsveness of the quantity of labour demanded toa cigs Iinown athe Hicks Marshall laws of derived demand. The ceqaal the pice elasticity of demand for labour is higher 1. when the other Stor of production can be easily _uostituted for labours 2 when the sepply curves of ther factors of reduction (such as capital) == HF inte hes the cont of labour i 3 large proportion of the total cost of podesion hes the rice elasticity of demand for the product of the firm is High ‘Those four import determinanis of the elasticity of derived demand #2) iscussed one by ne, 1. laity of sbsittion a he ali oss abr by capital or anoher other variable fat # coos by capital (or another other vars hath wo fain we le then, when the pce subsite abn ye the oper laws say that, the ig between the two factors. A high value of elastic oe bse podcton, Now cow wt ag labour rises (other hing remaining constant he 4 tpt. St and cape close ag ims will substitute capital for labour, and woe Fall in emi) fine SANE 17 ds ty oF tar me face tor a dy kits ma mee se Sess “ ‘vn he poor the pret cage the pit a! later ato or piven percentage cage rail, holding the leet of ouput constant c= 1-4 10% fal a rh raat “om inoease in K/L. 5 elaslty oF supply of ober factors {re demand fr labour wil be more late he sappy cares of ce fico such ssortid) te more lst. Suppose the wage rte as Tew dace fm osobtate ‘Sal to Istour,Howeve if he supply of capital (machi) nce. then the firm om pave nied by (0 substi out by apap, Te became a al i demand Or capt wil cause age nce he rae fluro. Ts the ieee demand fr labour wil be mle andthe cand fo tur wil be ew las Shortrun mlongerun : may be ed tha th owes of cba weigher min tong ru than Inthe sho eu. kn he long rote grad of capa ood Sch seat ipoent and machinery can exp tr capac anh sow peace can Emer ‘Simei Thus the long-run easy of soppy o ater faces wil be tgher than the orn clascity- Consequaly tbe logs clasity of demand fr labour would be ter thn the eoresponding sioctrun eli. 3 The share of Taboo cost total cast “Te propertion of lsbourcstin tl cot loan impetus termina ofthe eat ct demand for Tabour he proportion of boar costs ony 10% of total con then 3 {OE ein the wage ra, ce par, woul ras al oss by only 1%. However fhe fhe of labour cont fe 90% of til ana 10% nse im he wage rte would nee otal fat by 9. Since marginal ent wil cease fate in he tater cae han in the former, re wl increase fern te later cs and up ad hence cmployment wil fal ater ite ater ease. Ths the ager te shar oto Gs toa cons. the ihe he wage Amici of demand fo labour tens © be “This aw may not always Bodine. Tis argument sugges that be quantity of labour weer unit of output is independ othe wag ae othr word te Taw” aeesenly tre only inthe eau whee nts a1 be comine! in ned proprion Gc. a in the ‘eof Leomletiype pduetionfancton where ws have L-shaped isgunt) 4. lasticity of demand for the product of the Bron ‘An increase in the price of taboo (age ate) ea to an crease nthe output pes tal the prestoy the peggy of mand for th pst ofthe fim, the anger wil ‘the fall in industry output for a given increase im peice. The Large the fall tn ourpat, the A ea age of abou wh things ting the same). Thus the stronger Beet, eres hs act the he peste wil Ws the easy of demand ‘akon1 be adked that the individual fiem’s demand for an the fey demand However, the difference between the tw high elasticity of demand for the ou'put is uaa Final te ogo assy of demand ost her than ihe On ele Coreaontingy the lang ton pce ests of demand for laboge gy ng fe ee ay oa n ef Tit Twow OF Facrix Prune © 751 Wage rate affects a tution and oa rot pend on how easy it is for tour In ther words, the sizeof the By way of conclusion we may make three Comments On the derived. em, tnd ‘Skilled vs. unskilled labour : Labour is not homogencous a8 we pans fe jes ve of two broad categones, viz., skilled and unskilled. So theca sume rates —- one for skilled and another for unskilled labour. Thus when, of demand, we mean the own wage elasticity 2. Labour-labour substitution : Furthermore we have to substitution but also labour-labour subs ig, WE speak of Ny size of the sub Inthe short run, have a fined therefore, be used. Since, in the long. ta use more labour per machine, the possi, ‘The output effect : in the short run, because skill formation take: number of doctors or pilot. 3. Role of unions or any other input. Since the bargaining power of a trade unii ‘of demand for labour (the higher this e try to adopt necessary measures for lowering th ‘of demand for the final product depends largely on the avs ‘common for this substitute product to. be an imported unions to ssi the governt OF quotas so that ther it a much competition from foreign goods and px ic goods do not fall. Determinants of the demand for a variable factor by an individual firm In short, the demand for a variable factor (such as labour) depends on the follwig factors : 1. The price of the factor : This remains constant in a competit 2. The marginal physical product of the factor : This is derived from the produit function, 3. The price of the commodity produced by the factor : If there is perfect compet desnd However ial in the commodity market (VMP, = PMPP, = MRMPP, = MRP,). ee. Flere: facioe. “The seen 3 thot scorn ta Wis thotry' each fae 4. The amount of other factors which are combined with labour its marginal product. collaborating factors will shift the MPP, outwards to the right and hence will curve (and vice-versa), 5. The prices of ather factors: Since these prices will determine the demand f# (Competitive) factors and hence the demand for labour. 6. Technological progress : Techn product of all ge. The converse is also true 425.11 Marginal Productivity Analysis and Determination of Factor Shares | ig 10 David Ricardo, the analysis of the determinants of the share of total output é labour matkt | *eTuing to each factor of production has been the central concern to the development of yy. And at the end of the 19th centu Competitive Determination of Income Shares #8 Let us assume, for the sake of sii Producing a homogeneous inal 9 2= AK, L) and this ouput - lsbourets from the production process per peti s is rK (where ris the interest rate on the fi Machines and other capital goods). A profit-maxi | gical progress changes the puts and hence their demand,“ —s reat 9 HEM Me s spent One ars ay ML ee ee wos MP, K MP eK 1 a al and capital's share “The shares of labour . the production oe ie production fetion clang LT te ee alpen fed inputs wsed + the production - Feet em of econ foci, WN Rote of ouput lest ease of output with rxpetsg ct tk = ear oaput easy, i> ecco fom opt easy (ortin, For isan in ne MPL tabour's share “out @ 7 ar profcton fname conta ums 0 sale so emp eal pee js gs exe. ‘ttf ) ena CRS, we bow tat Mak al) = afik 1) for any a >0 itereiating swith get BES a vie = RK 2) fing kv, = RK 1) ~ @ ng the demand relations ‘Muiipying this equation by P and ws My im to [Ths i the essence of The i} al indeed of controversy among economists, SnoW pay» shows hat these shares Jo us this issue in the context the marginal pod Rei A ts ened eon wapapeenenny Wor ow Sew of tn ade Pts of te Marl Proce Theory! ‘As noted earlier the great neo-classical economists J. B. Clark presented a heey ff prc sd nce dann Which he most clad ofall we Hm Frsciy eo. Ant pret f te tery ix Wc. “Two De poses fhe mul pour theory of esibton a @ each factor (input) is paid the value ofits marginal product and (tral product its eased, leaving neither a surplus nor a deficit a 88 | ‘The Euler's theorem is used inal to rove these two propio ofthe mot P| theory. Te orm suet that's production func is homogeneous oH" S004, 1K) = 391,49 ua Packa nian Ree, a ln Faas Bo " ‘rdactviy teary is at theory ie to ‘i ‘Tw Two ow Pacwon Porcine, © 753 Cr nt pat hp POET. cat nomad yt th Ree root ee nag Set tea hecannee ss be arr of homoge fore euler cece Ul wt pet te tne connate ye caer of the mncpinal paca eteition fenaion exhibits constant eoceray = S2 es o h mapnpi il wy atop oe at Pose fear 8 SE waa Ss Be 1 seater prodt canton tm as ha he ony eendion i tsi genes Paton en os “ 2 ob, #8, mother words the sum ofthe cpt elas alo called the fnetion coefficient of she fokstion function) equals the deyres of homogeneity. This point cavity be wend Riezing to the Cobb Douglas prcton fencion Theming shat the production function is linearly omogeneous ond substiuting afi. Wwe est 20. 20. va Rex e nO) or EMP, + EMP, = 0 Tost wipes equals MP, times the quanti of Ibour plus A? times the quant of teach fator its marginal sia product then cipal, (aim Bas to pay the suppliers ‘Gal output would just be exhausted. For a linear homogeneous production function LL A), we have, for any A. AQ # /AK, HD. ‘Now taking the total derivative of AQ with respect fo % we get a0, FOL, Te de” OAL Oh AR” aH x. oe 2 art m® ene ee OE ee Loum Gouseenetnee sion scaled ny ming >= b ays ©ue sun ms ay eae oF Sioce oe “| o- Et ae ae rer of vale factors. Sine oy /op 10 nee ae rare can tM, i te ani 18 oan pre cme a TA ta a Sal Maid elsed OUtpu ifthe Septet eae ool pret 2 Tl ra were fos han ees Tha aera thn ove and would BE deer Fee ance at ada mE ht i rovcton function. auirlence a Protect Eshnoion and Prot Maxime rererauen of poh exanse s» curact 6 the. comin hy so ena we ety ution (3) BHA he peo ee oe de B)-afe )-re Al 2 | ee ee ain (12 = MRP, dr = MRP) Bt whe rkePO --8) “ee ct ouay pe ong-on ttl rvesoc So he Ameren 3 apa | ccocaioa tn marina! pity tery. ae (7) supgess 16 ta mp pul eo wher fe fe pice of fe frat of the fn ac oe a ny ey oi a enone ‘ Trot maiowsation nes 1 relevance 1 tmoumiing rm eli spt oe pice and enssses a proton con IGhanogees ego ne tuto a amen die pfR AL) ve AL =r --6] ‘Three Possibilities | ‘Thee ponies now exis : 9 i me es fe ir ah at ome tec pie Bt can he ince 1 ay fen hy cing a at) tnt we pt eta hc maa (1 te pce an a i ch a vy tae combination yi a mga PO Z i 1 Tea I ed BS valid te 4 = ‘Tom Timea op Facron Puno © 755 Sea Seis sone oe ee UK) le rt Fm homey of Pt - = ‘combunation (1,.AX,) will also yiekd a zero profi Serer e nse nee me Seam wereeee Fe ramen omen Ber ican enatacareee a ainienr ie 1 eation here i i iportant ruin Between the values of @ and the dstibutve shares of sev. By deiion treo ou = ant he cpa = 2A ‘us the relative for share Is shareof labour wk whe ‘ Sewage «EEE ° From (3) we ean easly ind thee of change inthe wr onthe relative shares ot te tro factors. Live suppos the wget ato ices by 10% An nase inte ative price cfc he wager) wl ead toxin of cpl fix abour abou by ep) fe! heey vo a nee in the capa rt, Suppoe i inereases by 5%. Then the sic of subtution les than one rom hs iniason we ean ifr te behaviour frltiv factor shares, Inti ase wir nereases by 10% and AVL. increases by oly 3%. Ts ean that L/P nee Canse By assumption, te wagenteet rao increases — because, perhaps the spel stcaptl increases proportionately fre an tat of nbooe. As laboatReeomes elavely ‘coe andelaively more expensive, etrprencus substitute epital fr labour to the extent tamive by the technical Soins of roducton. Now ifthe production Function i dared by inelni Ginperic) substeabil.eaeprenews canoe subsite capital {lar in te same proportion ste age at has ne eave to terest om capital ‘Ts ihe relative share of labour must rise. From this analysis we arive at the following brpsion sgading the easy of usta and Behaviour of lave facto shares : ‘Proposition: tna production pros involving the Ug of two Variable Factor, which te etn: narrate rnb) nes eave oto tear apt, Flats dua the fomee Cb) wl ieee, remain unchanged oF fall depending on with he ee of sbstton I es than, equal fo, or greater than unity, TRS position may be proved a flowsProof 7k with espe {0 a Wwe get sk. iterating Wk wil epee oF ea change in the w/r results in a = 1 i i oe r40-4040) (RTE 005) Mw wd funy | asta (ie) Chey (ew ie at) > Gil ave are ay lg Ladin ame hen ahaa see tarde Recep 9 8S ea tos 08 lamin Tem seo (i) «BER () Clearly if © > 1 the relative shire of labour decreases following an ince nm, {ne same way if = 1. the rave shares of capital and labour remao wg In short, an increase in wr wil lead to (@)a tise in Inu’ share, relative to capital, (©) a fal in labours share, relive to capita, ifoI (© constancy of labours share, relative to capital, if @ = 1 A decreas in w+ of capital Comments have the oppsive elects on the share of labour eave erable importance in {2st Is extremly useful in examining the WY A coc Given tht wir ato changes i Proportions affect income shares. Given | i aor yn Ys. edicons aout actor she oe OM, oder al Be mean if they do ot take into ited changes inthe othr rate; THe Then oF Facrom Pavesi @ 61 2s. ‘The SUPPIY Of Productive Factor (oput o-a Firm erkt SPD) for a ftp \ Ps ovat sloping dao icenng fcr cot 1 pcr gees Mn mer ane ns Be pet Te emt mies are in a met 0 on at ia cas ef en fom Sets he cs a ie a bot wee pe he thn Gotan spy esos ans 909 Pend on uly moXintn by wor, ms ta ee eee When the market for 3 facto ing firm can patehase ame termined bythe interaction ci market demand and supply cures, s shown in ig 3, 2 (a. The input supply curve tain fim them completely clastic Ths in i. 25.8), fem is ying aber sce a pet wr Because the fm i only a very (small pat) of the labour marke, ean iy much abut a0 pwuible without afentingipie, Les the wage oe 3 (0) Fem @ 3 = Uris ofa? Fig. 258 A Flows Input Purchase in Competitive Market The suply curve facing the frm in Fig. 25.0) is its average fctr cost AFC,) curve "und, the marginal factor cos (MFC,) cuve of labour represents the firm's cont of an sto ct lo fate forint kite he as ee cao ae ee ees eater ee es ‘ines (ie., bots are completly elastic at the matket-determined wage cate) 9.25.15 The Optimum Purchase of Inputs . scsats ow inuch of lbout input shoulda frm facing a competion factor market purchase Fie Ar a ee cute Ine EGVEIAUPC ive wat tau (Grofit) of the fmcan be incesed by puchsing moe wi labour tease te bene fee end caenyseat (HPO) awe. when Ne MAP cve bg ct QI) eels eat ar ee tha co Om cae sae wn RP be el 10 ME Sia = wand =P. he ob veprabea matt so comes nl — ger thea weal Wn cn oar cat verotbe pita i pce of he aet seg 0H mari at, | oe ‘MFC = W con sins inc by pl i 25:80 2 25:16 Wage Determination in a Free Market (under Perfect ¢ 2 ene nen hon Boer i ean sa ech frit mand in WH Sy oe sree oops we 39g "y a mi cath aber Srna demu rth mor of woes 3] > c oye this wage, Te tw ae detervined ‘Smutneusiy bythe nero af the market dlmand curve for labour (2) and this market Soply amv (the wage me goes above the elu level W,, there will be excess ‘ppl of labour and if he wage rate i Blow Wr then hee vill be an excess demand for labour. I equitiam the wage rate W, wil be the same’ across all the sndusies among, which Inboer i tely (Completely) mobile If one kona Indusy pays bigher wage rate. the workers from other indus wile toi. The press comiou onlay nage Greaney ‘liminated, = = Fig. 25.9 guido Wage at snd Employmes ‘An increase ma UPPLY Of labour will lead to a fallin the wat tet ia ML of aor wea to fa in he wage a a Gr Minion Wage Law ¥ yremmment policies often ‘ars, £0 = affect the demand for labour, supply of labour, and rom the arm vesting npn of ma wane TH ae htt foes Tae wo eo nen apn re orient bo ad bee Eee Sr cat cay of mae pe ssp ne coves te oi eter nis cduction that minimum wage lens. trie be js = a ee iv ene aeets ict bs to be (ed shove te mare er Coalihcm tet (ha eee sett ee noel nce ecogey ang B30 he lve of eoloymat Tk npc mien ge See rou tr tell capeyce tt ee “ Fresno Ody, But at this wage the number abou Ghiescehers larger (1) More workers wil (pie labour force, and the sleady week Sit want to work longer hows. Ths ecline in employment bows and = stsate in the quant of Iahour supple Tefore. il" Lily + fly = magnitude of involuntary unemployment (in hours). sich higher ha the Tallin employment fy induced by the minimum wage Taw. oman Wage Law eave Eifet of Minimum Wage Law Minimum wage tas are passed to ensure equity. Whether this cun be achicved depends ‘the slopes ofthe demand and suply cures oF bour Ths pont is ilestated in Fig. 25.11. oe ee rig, 2511 Bet of Misinum Wate Law o Fpioyment une ofiaba ‘is of au?Se cae ce a im eneyment Lal WE al th te ce te Sa is et come emmoar pset {or most ofthe unemployment a ie greater han eat i the Bs “2h tem a hy the fall employment Fa in yen Hose sn me ace Segmented Labour Mé workers are Howe se a emt) te ny ce Mn sm iin a ro cerca a ean is that the unemployed worker wit toh Senna aes ape ae eG “Fran, wah eee minicar wage fepislation. The WaEe rate inthe equa ere eer nn pt ree or ee 2 4] : Hos : a e ‘ “ Th, mpc 4 te a >—thiaam $ Leama ace ioe Fig 25.12 ect of Mininum Wage Law in Segrauted Labour Mads ntialy, the wage rate is w, in both the sectors. Employment is Fin the covet and, othe uncovered sector. With a minimum wage Win the coeed ene Toe unemployed ‘workers (L.,~ 1'.) ty 10 find job inthe sector The wage rate in the uncovered sector falls to'W, #6 AL = L) os tess than «1 ze Bl 'W, s6 that the increase in age me falls. At the sr 1.9. This is because some workers will leave the amount of anemplon The main objec ‘mest. But the unemployment will be less than that with ‘of income by raising ve OF minimum wa Tiwe Troy oF Facron Puicwe © 765 bre worve thin the ma ‘ eet al tlie. ANI maa tye Soe common Fre thier wage ag Ste wer wl ced tang J ne vf seeto ae rte bet cthers wil be either unemployed or employed In the sero Cae sensi of the Scheme Gees SUE a neon ht ere we cna pen defcemes fhe wim ag egton ey eT hw ep tS la 26 all in employment: Empoyment opipattamen ante ee eos inte cee sewn leased by (Income dri may fll mate shan im proportion to the wage ng eiings. Wage rater a uncovered sectors may Secor sea the wauaveted set force to sbxoe the covered sector The impact of the leyysiation on family income distribution soy be pavers unless the fever bat eter obs allocated to members of sed fariis Serttan'o low ‘age worken. most ction teenagers fom meals fang (ai Qypertuity con: cra insight by economia shat mimes wage legion sic tho oyetly Set ofthe least able but doesnot wnarbirasy cap The legal ferns tha employers cannot pay less than specified wage is cxuaient to the Seal ‘Spin hat workers cannot work all inthe pctected sete unless they Sad employees Tiling to hive them st that wage Larger minimum wage recon would presumably rise covered worker welfare and ployer cost An odjustnen employer could make an crea ie sama wage toni be an increase in efor demand cet reduction i the comemenct (or sumer) of “edule work hous, Perhaps the mod senous concer about sansmem wage law i he denial r &redution inthe provision of on-be obtaining to he yout SUMMARY |. Demand for inte: ck of potion demanded besa s pouctive The maria esc theory explain how af aes decom ezanng te opumum perchane of variable ‘Sas According to this thar the mari even roc MRP) carve ofa Gach as fabout \Stsdenae cure and posing meas ep eptmal pochae of abou by euning {et oa ah he MFC ea MRP Sere wry coumton fr a ferme The AP equal te pie Ftc po es he woes ariel physical prc weer only that othe HRP cutee br whic es brow he AP uve i pot sceing dean ceve or labs nde pret corngctice. The pal ada ery weeny Seay denen fos cl fvar The alae ft ature save sowing te uanten ‘tke a tem slung wo fe derek pee fib at a ilerent wage aes, 2 Several nasil vert What uc oboe ogy te ofa oa factes tn ober Meare tise one eure show ow poiaceing fim taken ang aed te oe 2. Changes in demand: hee a sy be changes the demand for about (a any her Neer hen wee nthe moi ysl post flor he mart price Of the proc