MARGINAL PRODUCTIVITY THEORY
Now let us see how the services of factors of production are evaluated. One theory put forward ill this connection is the marginal productivity theory. We find references to marginal productivity theory in von Thunen’s isolierte Staat 1)1826). Long-field’s Lectures on and in Falconry George’s I’mgr(‘ss and (1879). Uut John Bates Clerk’s name is most widely associated with its development. In 1981s and 1890’s Jevons, Wicksteed, Marshall, Wood, Walras anti others made important contribution to its development. The entrepreneur buys the services of the various factors of production. Since he works for profit. he can only pay a price for a factor which he finds just worthwhile. Obviously, he cannot afford to pay more than its marginal productivity. Since there is open competition. nobody will accept less than marginal productivity. That is how marginal productivity (not total productivity) determines the remuneration n l r the price of a factor of production. The entrepreneur, in employing the various Iac Of production, acts on the principle of substitu- lie vulwtitutcs utiler murgmal productivitics of all the ls he uses arc quah cd In this way. he maximise his profit, What is marginal pnx luctivuy? Marginal product may he the increase ill output secured h) . II increase III the use (If a factor, If we muuuuy increase in output by the prevailing price, we get the value of the marginal product or the revenue from the marginal product. This is called Marginal product.
i.e., the addition to the total revenue resulting from the use of one more unit of a factor of production. We use brierley marginal productivity in place of marginal revenue productivity. We repeat that by the marginal productivity of a factor of production we mean the addition made to total production by the employment of the marginal unit. i.e., the unit which the employer thinks just worthwhile employing. It may be distinguished from average productivity which is obtained by dividing the total product by the number of factor units employed. At the margin of employment, the payment made to the factor concerned is just equal to the value of the addition made to the total production on account of the employment of the additional unit of a factor. If, for instance, the prevailing wage is less than the marginal productivity, then more labour will be employed. Competition among employers will raise the wage to the level of marginal productivity. If, on the other hand, the marginal productivity is less than the wage, the employers ate losing and they will reduce their demand for labour. As a result, the wage will come down to the level of marginal productivity. In this way, by competition wage tends to equal the marginal productivity. This applies also to the marginal production and their reward.
Thus, the marginal productivity theory lays great emphasis on the close connection between the price of a factor and the price of the product that it produces. It seems that the factors of production earn that they get. Under perfect competition, a linn will be maximising its prolit by equating marginal revenue product of each factor with its price. This indicates the extent to which the use of a factor.of production will be pushed in production. Also, factors of production tend to move from those uses in which their marginal productivity is low to those in which it is high. In this way, a given supply of a factor of production is distributed in such a way that its marginal productivity is equal in all the uses. Thus, we can say that the price of a factor of production is determined by its marginal productivity and this marginal productivity is the same in all its uses
Thus, in a position of competitive equilibrium: (i) the marginal productivity of a factor of production is the same in all its employments. (ii) the marginal productivity of a factor of production is measured by the price of the factor of production, and (iii) marginal productivity of various factors arc proportional to their respective prices. Hence, over the whole field of employment. therefore, each factor of production tends tu he paid in proportion to its marginal productive it). Thus. the distribution of National Dividend is not a scramble as the strikes or lock-outs make it appear to be. It is governed by a definite economic principle. viz., marginal productivity theory, It should be noted that for any individual employer working under competition, the prices Ihal he has to pay for the factors of production arc already determined. Since his demand for the factors or is only all ill proportion of the demand. his cloying g more or less of the factors docs not appreciably affect their prices. What he docs is to push the use of each of the factors tu such a point as to make its marginal productivity equal to its price as already determined by the market forces. Hence. the price of a factor of production j, determined by the marginal productivity not any particular employer hut of employers in the.