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Factor Pricing
We have seen that the marginal productivity theory of distribution is highly unsatisfactory. It simply tells us how many factor units will an entrepreneur employ at a given factor price in order to maximize his profits. The theory fails to explain the influence of supply of factor units and does not tell how the factor price is determined.
On the contrary the modern theory of distribution the supply and demand theory of distribution provides a better and more satisfactory explanation of factor pricing then the marginal productive theory. According to this theory factor pricing is only a special case of the theory of price. Just as a price of a commodity is determined by its demand and supply in the same manner the price of a factor is also arrived by the interaction of the forces of demand and supply.
According to Lipsey and Stonier, “the theory of factor prices is just a special case of the theory of price. We first develop a theory of the demand for factors, then a theory of the supply of factors and finally combine them into a theory of determination of equilibrium price and quantities.”
Demand for factors of production
There are two main features of demand for the factors of production:
(i) The demand for factors is a derived demand: since the demand for a factor of production depends on the demand for the commodity, which it produces, it is called derived demand. For example, the demand for labour depends on the goods it produces, as the demand for land depends on the demand for agricultural products and so on. As such the demand for the factors of production is derived from the demand for goods they produce.
(ii) The demand for factors is a joint demand: factors of production are jointly used for the production of goods. For instance, to produce foodgrains we receive land, labour and capital.
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On the contrary the modern theory of distribution the supply and demand theory of distribution provides a better and more satisfactory explanation of factor pricing then the marginal productive theory. According to this theory factor pricing is only a special case of the theory of price. Just as a price of a commodity is determined by its demand and supply in the same manner the price of a factor is also arrived by the interaction of the forces of demand and supply.
According to Lipsey and Stonier, “the theory of factor prices is just a special case of the theory of price. We first develop a theory of the demand for factors, then a theory of the supply of factors and finally combine them into a theory of determination of equilibrium price and quantities.”
Demand for factors of production
There are two main features of demand for the factors of production:
(i) The demand for factors is a derived demand: since the demand for a factor of production depends on the demand for the commodity, which it produces, it is called derived demand. For example, the demand for labour depends on the goods it produces, as the demand for land depends on the demand for agricultural products and so on. As such the demand for the factors of production is derived from the demand for goods they produce.
(ii) The demand for factors is a joint demand: factors of production are jointly used for the production of goods. For instance, to produce foodgrains we receive land, labour and capital.
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Demand Capital Characteristics
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Factor Pricing
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