The modern theory of factor pricing, developed by Karan Verma, explains the determination of factor prices through the demand and supply of production factors, emphasizing derived demand. It operates under assumptions of profit motive, perfect knowledge, and competition in factor markets, ultimately seeking equilibrium price. Criticisms highlight its limited applicability to real-life scenarios and challenges in correlating marginal revenue product with 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