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MODERN THEORY OF
FACTOR PRICING
Presented by
Karan Verma
(167521)
BBM-
206
Content
 Meaning
 Assumption of theory
 Demand For a Factor of Production
 Supply For a Factor of Production
 Price Determination Factor Pricing
 Criticism
Meaning
 It provides a satisfactory explanation of the
problem of factor pricing and distribution.
 It is also known as the demand and supply
theory of distribution.
 It consider both prospective
◦ Demand of Factor of Production.
◦ Supply of Factor of Production.
Contd….
According to Robert Lipsey
“The theory of factor prices is just a
special case of the theory of
pricing. 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.”
Assumptions
 Profit Motive.
 Perfect knowledge of
MRP.
 Competition exists:-
◦ In the Factor Market.
◦ Different units of factors.
 Prefect Competition
Demand For a Factor of
Production
According To This Law:-
 Demand for factors is a Derived Demand
 Demand curve the firm = MRP(Marginal Revenue
Productive)
INDIVIDUAL FIRM MARKET
DEMAND CURVE
Supply of a Factor of Production
 Supply of Land
◦ Perfectly inelastic
◦ Depends on opportunity cost
 Supply of Labour
◦ No relation between supply of labour
and wage rate.
 Supply of Capital
◦ Direct Relation Between rate of interest
and supply of savings
 Supply of Entrepreneur
◦ depends on many non-economic factors
Price Determination Factor
Pricing
 Price will tend to prevail in the
factor market at which the
demand and supply are in
equilibrium.
Criticism
 Theory doesn’t applicable in Real life.
 Theory ignores the increasing returns
in factor pricing.
 Very difficult to coordinate MRP with
Factor pricing.
 Assumption of Prefect substitution.
REFERCENCE
 www.economicsdiscussion.net/theory-of-
distribution/modern-theory-of...an.../7414
 www.economicsconcepts.com/theory_of_fa
ctor_pricing.html
 www.wikipedia.com
 Book- Micro Economics (by V.K. Ohri)
 www.yourarticlelibrary.com/.../perfect-
competition/...factor-prices-under-perfect-
com
Modern Theory of factor pricing

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Modern Theory of factor pricing

  • 1. MODERN THEORY OF FACTOR PRICING Presented by Karan Verma (167521) BBM- 206
  • 2. Content  Meaning  Assumption of theory  Demand For a Factor of Production  Supply For a Factor of Production  Price Determination Factor Pricing  Criticism
  • 3. Meaning  It provides a satisfactory explanation of the problem of factor pricing and distribution.  It is also known as the demand and supply theory of distribution.  It consider both prospective ◦ Demand of Factor of Production. ◦ Supply of Factor of Production.
  • 4. Contd…. According to Robert Lipsey “The theory of factor prices is just a special case of the theory of pricing. 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.”
  • 5. Assumptions  Profit Motive.  Perfect knowledge of MRP.  Competition exists:- ◦ In the Factor Market. ◦ Different units of factors.  Prefect Competition
  • 6. Demand For a Factor of Production According To This Law:-  Demand for factors is a Derived Demand  Demand curve the firm = MRP(Marginal Revenue Productive) INDIVIDUAL FIRM MARKET DEMAND CURVE
  • 7. Supply of a Factor of Production  Supply of Land ◦ Perfectly inelastic ◦ Depends on opportunity cost  Supply of Labour ◦ No relation between supply of labour and wage rate.  Supply of Capital ◦ Direct Relation Between rate of interest and supply of savings  Supply of Entrepreneur ◦ depends on many non-economic factors
  • 8. Price Determination Factor Pricing  Price will tend to prevail in the factor market at which the demand and supply are in equilibrium.
  • 9. Criticism  Theory doesn’t applicable in Real life.  Theory ignores the increasing returns in factor pricing.  Very difficult to coordinate MRP with Factor pricing.  Assumption of Prefect substitution.
  • 10. REFERCENCE  www.economicsdiscussion.net/theory-of- distribution/modern-theory-of...an.../7414  www.economicsconcepts.com/theory_of_fa ctor_pricing.html  www.wikipedia.com  Book- Micro Economics (by V.K. Ohri)  www.yourarticlelibrary.com/.../perfect- competition/...factor-prices-under-perfect- com