Classical Marginal Productivity Theory

Marginal productivity Theory

 

 

The national Income (NI) of a nation is the result of joints of land, labour, capital and entrepreneur. There a question arises there that how much national income (NI) is distributed amongst such four factors of production? In this context, the classical economists presented Marginal Productivity Theory. This theory states that the wages of the labour will be equal to the marginal product (MP) of the labour. After classical economists the neo-classical economists like Hick accorded marginal product (MP) theory just dealing with demand for labour side. Accordingly, they think that in respect of wage determination we will have to include the supply of labour even. Thus according to the neo-classical economists, in the competitive economy the wages will be determined where demand for labour is equals to the supply of labour. The neo-classical assumes perfect competition in both goods and factor markets. But practically we find certain other possibilities in respect of factor pricing. As there exist perfect competition in the factor market and monopoly in the goods market.

 

Classical Marginal Productivity Theory:

 

As we all know that the net change in the total production by employing an additional unit of labour represents marginal product, while the monetary representation of marginal product (MP) is known as value of marginal product (VMP)

 

According to the MP theory:

‘If there prevails perfect competition in goods and factor markets the payment of the labour will be equal to its VMP’

 

The MP theory is further explained in two cases:

 

  • When the firm is employing just units of labour
  • When the firm is employing both labour and capital

 

* Firm employs only labour:

                 The situation where firm is producing the goods just with the help of a single variable input like labour it will;

 ‘Employ that much of labour that the VMP of the last labour becomes equals to prevailing wage rate (which is fixed because of the perfect competition in the labour market)’

 

 

* Firm employs several variable factors:

                In so many cases the production does not depend upon just units of labour, rather it depends upon labour, capital and land etc. In such cases according to MP theory;

‘A firm will be in equilibrium when it employs different factors in such a way that ratio of MP of such factors and their prices becomes equal’

Profit Theories in Economics (Part 1)

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4 thoughts on “Classical Marginal Productivity Theory

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