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Saturday, 7 May 2011

Critically examine the Marginal Productivity Theory of distribution

MARGINAL PRODUCTIVITY THEORY :-
Land, labour, capital and organization are thew four factors of production. These factors are hired by the firms to produce goods and services. Rent is paid for land, wages for labour, interest for capital and normal profit to the organize. These prices remunerates are determined in the market. Now the question is that how the out put (which produced by these four factors) should be distributed among these four factors or how the reward should be determined the market?
Modern economists agree that they are determined by the forces of demand and supply. However the classical economists had a different opinion. They were of the view that the prices of factors are determined by the marginal productivity.

Marginal productivity means the net addition or net subtraction caused in the total production by employing or withdrawing one unit of production.

A producer always compares the marginal product value with the price of a marginal input unit. This theory states that price of each factor of production tends to be equal to its marginal productivity. We can explain this theory by the following schedule and diagram :




EXPLANATION :-
According to this table, the wages of worker are fixed in the perfect market according to demand and supply conditions, Rs. 60 per day. The price of cloth per yard is Rs. 10. in the market. The firs two workers marginal product value is greater than the rate of wages while the 3rd worker's marginal product value is equal to the wages.If the fourth worker is employed, the producer will suffer a loss. So it is concluded that each factor gets the reward according to its marginal product.



EXPLANATION :-
At the point "A" wages of labour and value of marginal product are equal to each other. So all the three workers will receive the wages equal to their marginal product value (Rs. 60). So the reward of each factor of production will be paid according its marginal product.

ASSUMPTIONS OF MARGINAL PRODUCTIVITY THEORY

1. HOMOGENEOUS UNITS :-
It has been assumed that all the input units are exactly same.

2. FACTOR SUBSTITUTION :-
It is assumed that various factors of production can be substituted for one another. For example capital can replace the labour.

3. MOBILITY :-
It is assumed that various factors of production can move from one occupation to another for higher return.

4. PERFECT COMPETITION :-
It is assumed that there is perfect competition in the market.

5. ELASTIC SUPPLY OF FACTORS :-
It is also assumed in this theory that the law of diminishing returns also applies to the business organization.

CRITICISM ON MARGINAL PRODUCTIVITY THEORY OR OBJECTIONS ON ASSUMPTION

1. HOMOGENOUS UNITS :-
This theory is based on wrong assumption that all the units of production are homogenous. For example all the workers ability and efficiency can not be equal.

2. NO CLOSE SUBSTITUTE :-
It is also wrong to assume that the factor of production are close substitute for one another. Labour can not be perfect substitute for capital.

3. PERFECT COMPETITION AND FULL EMPLOYMENT :-
This theory assumes that the reward of each factor of production is determined under the conditions of a perfect competition and full employment. While in actual world it is not possible.

4. LAW OF DIMINISHING RETURNS :-
It is also wrong to assume that the law of diminishing returns applies to the business organization.

5. DIFFICULTY IN MEASURING :-
It is very difficult to measure the marginal production and its value.

6. SUPPLY FACTOR IGNORED :-
In this theory demand factor has given much importance while the supply factor has been ignored. While infect both have an equal importance.

7. WITHDRAWAL MAY CAUSE A LOSS :-
Each factor of production works in co-operation with other factors, if one is withdrawn it will disorganize the whole business and may cause a loss.

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