Theory of
Factor Pricing OR Theory of Distribution:
The theory of
distribution or the theory of factor pricing deals with the
determination of the share prices of four factors of production,
viz., land, labor, capital and organization.
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The marginal
productively theory is an attempt to explain the
determination of the rewards of various
factors of production in a competitive market.
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In a perfectly
competitive market, an individual firm cannot influence the
market price of a factor by increasing or decreasing its demand.
So it has to hire units of a factor at its prevailing price in
the market.
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The modern economist
discard the marginal productivity theory on the ground that it
completely ignores the supply side of a
factor of production.
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