What are the Assumptions of Marginal productivity Theory?
Here we understand and know about the Assumptions of Marginal productivity Theory in detailed.
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What are the Assumptions of Marginal Productivity Theory?
First of all, we understand about Marginal Productivity Theory and then discuss its Assumptions one by one in detailed.
Marginal Productivity Theory:
The Marginal productivity theory of distribution explain how the national income is distributed among various factors of production, means, it explains how the price or the share of each factor of production is determined.
This theory also called as the theory of factor pricing. The sum and substance of this theory is that the price of the factor of production depends upon its marginal productivity, that is, a particular factor of production gets its reward according to its marginal contribution it makes to total output.
Now we will discuss the Assumptions of Marginal productivity Theory:
The marginal productivity theory of distribution is based on following assumptions:
- The theory assumes that there is perfect competition both in the factor market and in the commodity market. It implies that: (a) The supply of a factor of production if perfectly elastic, the employer can get any amount of a factor at the prevailing market price of the factor. (b) The demand curve for the product of the firm is perfectly elastic, here the firm can sell any amount of output at the prevailing market price. It has not to lower the price in order to sell the additional units of output it has produced.
- All units of factor of production are homogeneous or uniform in nature, there is no difference in the quality or efficiency of different units of a factor. For example, in the case of labour, it is assumed that all workers are of equal efficiency. If the units are not homogeneous they will not be equally rewarded. The more efficient units will get a high price than the less efficient ones.
- It is assumed that the amount of a particular factor that is used can be continuously varied so that it possible to use little more or little less of the same factor. Means factors of production are divisible.
- The theory is based on the assumption of perfect mobility of the factors of production as between different employments and regions.
- The theory is based on the operation of the law of diminishing returns as applied to the organisation of business.
- The theory is based on the assumption of full employment, that is, all the units of factor are fully employed and no unit is available for work at a price which is less than the prevailing market price.
- The theory assumes that there is no change in the technique of production. Means the theory is applicable only under the static conditions.
- The theory also assumes that the employer acts rationally. His aim is to get maximum profits.
- The marginal productivity theory only applicable in long period. In the short period, the price or the reward of a factor may be more or less than its marginal productivity.
- The theory assumes that it is possible to change the combination of the factors of production without disturbing in any manner the organisation and working of the production unit. Means, it is possible to substitute one factor for another.
Assumptions of Marginal Productivity Theory
Factor of production is perfectly elastic
Factors of production are divisible
Based on the law of diminishing returns
Marginal Productivity theory of Distribution- Assumptions of Marginal productivity theory.
Tech writer at NewsandStory