Marginal Productivity Theory
Wages are decided according to
this idea based on the productivity contributed by the last worker, i.e.
marginal worker. His or her work is referred to as "marginal
productivity." Micro Theory of Factor Pricing is another name for it.
Analysis of Marginal Productivity Theory
The price of each factor of production is determined by the equality of demand and supply under perfect competition. Because the theory implies that the economy is fully employed, the supply of the factor is expected to be constant. As a result, the price of a factor is defined by its demand, which is dictated by marginal productivity. In such circumstances, it is critical to shed light on an industry's demand curve or marginal productivity curve.
Since the industry is made up of a large number of companies, its demand curve can be built using the demand curves of all the companies in the industry. Furthermore, a factor's demand curve is defined by its marginal revenue productivity. A firm's demand or labor is solely dependent on its marginal revenue productivity for this reason. A company will hire the number of workers whose marginal revenue productivity is equal to the current wage rate.
Fig1: Demonstrates that the demand for labor is ON1 and the marginal revenue productivity curve is MRP1 at pay rate OP1. Firms will enhance production by requiring more labor if the wage rate falls to OP. The price of the commodity will reduce in this case, and the marginal revenue productivity curve will change to MRP2.
EXAMPLE
A reduction in labor expenses associated with the production of an automobile, for example, would result in marginal increases in profitability per car. The law of diminishing marginal productivity, on the other hand, states that managers will see a diminishing productivity improvement for each unit of production. This frequently results to a decrease in per-car profitability.
A benefit threshold being exceeded can
also result in diminishing marginal output. Consider a farmer who uses fertilizer
as a component of the corn-growing process. Up to a certain point, each
additional unit of fertilizer will only enhance production return marginally.
The addition of fertilizer does not boost productivity and may even impair it
at the threshold level.
Consider a business that has a high degree
of consumer traffic at particular times of the day. The company could increase
the number of employees available to assist consumers, but beyond a certain
point, adding more employees would not raise total sales and may even result in
a decline in sales.
Published By: Apurva Rajpal
1910112
