7. Marginal Productivity Theory and Rent INTRODUCTION: It explain how the national income is distributed amongst various factors of production. It help for determine the price or the share of factor of production. Price of factor of production is depend upon its marginal productivity. The marginal productivity theory is firstly developed by David Ricardo and Edward West This theory was first used to explain the determination of wages, but later on, prices of other factors of production like land, capital.

7. Marginal Productivity Theory and Rent EXPLANATION OF THE THEORY: The price of a factor of production tends to be equal to its marginal productivity. Two Important point must be noted in this connection: 1.The reward which a particular factor or production gets is income for that factor but it is cost to the employer using that factor 2.Productivity of factor is of two types: a.Physical productivity b.Revenue productivity Revenue productivity is also divided into two types: 1. Average revenue productivity 2. Marginal revenue productivity Price of factor of production is equal to marginal productivity Price of factor of production is less then to marginal productivity: Beneficial Price of factor of production is more then to marginal productivity: Losses

7. Marginal Productivity Theory and Rent ILLUSTRATION OF THE THEORY: Units of Labour Total Production (Units) Marginal Physical Product (Units) Price (Rs.) Marginal Productivity (Rs.)

7. Marginal Productivity Theory and Rent RENT: Meaning: The term rent means a periodical payment made to its owner for the use of any particular thing. Ex: Rent of building, Rent of machines, rent of furniture Periodical payment is made according to the contract agreed upon by the two parties Types of Rent: 1.Contractual rent: Periodical payment made by a tenant to the owner of a thing for its use and includes interest on capital investment is called Contractual rent. 2.Economic Rent: Payment made for use of factor of production is called Economic rent.

7. Marginal Productivity Theory and Rent ECONOMIC RENT: There are two types of economic rent 1.Differential Rent: Ex. Rent according to Land – Fertile or Not 2.Scarcity Rent: Its concern with Labour and Capital 3.Quasi Rent: The concept is developed by Dr. Marshall Short period returns earned by factors of production other than land. CONCEPT OF RENT EXTENDED TO OTHER FACTORS OF PRODUCTION: 1.Rent of land 2.Rent of labour 3.Rent of capital 4.Rent of enterprise

7. Marginal Productivity Theory and Rent PURE RENT & QUASI RENT: 1.Pure rent is the surplus income accruing to landowners while quasi rent is the surplus income accruing to the factors other than land 2.Pure rent and quasi rent both arise because of scarcity. But pure rent is permanent as scarcity of land is permanent. As against this quasi rent is a short term phenomenon, because the scaricity of ther factors of production can be removed in the long run

8. Wages, Interest and Profit MEANING OF WAGES: MEANING OF WAGES: “The share of labour in the national income is known as wages”. “The price paid for the services of labour”. TYPES OF WAGES: 1. Time wages & Piece wages 2. Money wages & Real wages FACTORS AFFECTING REAL WAGES: 1. The purchasing power of money 2. The form of payment 3. Possibility of extra earning 4. Regularity or Irregularity of employment 5. Nature of employment 6. Future prospects

8. Wages, Interest and Profit MEANING OF INTEREST: MEANING OF INTEREST: “interest is the return from the fund of capital” TYPES OF INTEREST: 1. Gross interest 2. Net interest COMPONENTS OF GROSS INTEREST 1. Net interest or pure interest 2. Insurance against risk (Personal risk, Trade risk) 3. Payment for inconvenience 4. Reward for management

8. Wages, Interest and Profit PROFIT PROFIT

8. Wages, Interest and Profit