Essence of Marginal Productivity Theory of Distribution.

A theory of distribution formulated in the 1890's which states that input to production - whether capital or labor - will continue to be added until the value of its marginal product (the revenue or yield resulting from the input) is equal to the cost of the input.

A theory of distribution formulated in the 1890's which states that input to production - whether capital or labor - will continue to be added until the value of its marginal product (the revenue or yield resulting from the input) is equal to the cost of the input.

A theory which tries to answer this question and which has been fairly widely held by professional economists is known as marginal productivity theory of distribution. It may however be pointed out that in recent years its popularity has somewhat declined due to biter criticisms leveled against it. The essence of this theory is that price of a factor of production depends upon it marginal productivity. It also seems to be very fair and just that pike of a gastro of production should get its reward according to the contribution it makes to the total output its marginal productivity.

Marginal productivity theory was first put forward to explain the determination of wages reward for labour but later on prices of to her factors of production such as land capital also were explained with marginal productivity. The origin of the concept of marginal productivity can be traced to Ricardo and west. But both Ricardo and west applied the marginal productivity doctrine only to land. The concept of marginal productivity is implicit in the riparian theory of rent.

But the idea of marginal productivity did not gain much populate till the last quarter of 19th century when it was re-discovered by economists like J.B Clark Jevons wick steed walrus and later marshal and J.R hicks popularized the doctrine of marginal productivity. Since marginal productivity theory has been mainly evolved for the determination of reward for labour we shall discuss below its application to wage determination. But it should be understood to apply equally to the rewards of other factors of production.

J.B Clark and American economist who developed marginal productivity theory of distribution in a number of articles and later on presented it in a complete form as an explanation for the distribution of weal in order to bring out the fundamental factor at work in the mechanizes of income distribution Clark assumed a completely static social free from the disturbances caused by economic growth or change. In other words assumed a constant population a constant amount of capital and unchanging techniques of production besides the assumption of a static economy he also assumed perfect competition in the factor market and perfect mobility on the part of both labour and capital.

Further it was assumed by him that the total stock of capital remains constant. Clark also supposed that the form of capital can be varied at will. In other words physical instruments of production can be adapted to varying quantities and abilities of available labour. Further he treats labour as a homogeneous factor by taking identical labour units and discusses how the wage rate of labour id determined.

Every employee or entrepreneur will try to utilize his fixed amount of capital so as to maximise his profits. For this he will hire as many laborers (labor unties) as can be profitably put to work with a given amount of capital. For an individual firm or industry marginal productivity of labour will decline as more and more workers are added to the fixed quantity of capital. He will go on hiring more and more labour units as long as the addition made to the total product by an extra labour unit is greater than the wage rate he has to pay for it. The employed will reach equilibrium position when the wage rate is just equal to the marginal product of labour.

Date: 2016-01-03; view: 1275