PRICING THE FACTORS OF  PRODUCTION. such as rent,wage,profit and interest.

1. (RENT,WAGES,PROFIT,INTEREST)

2. MARGINAL PRODUCTIVITY OR THEORY OF
DISTRIBUTION

3. Four pricing factors of production:

4. According to David Ricardo Rent is defined as
“that portion of the earth which is paid to the
land lord for the use of original and
indestructible powers of soil

5. 1.Ricardian Theory of Rent.
2.Modern Theory of Rent.
Ricardian theory of rent:
According to Ricardo,rent is the payment for the use
Of only land and is different from contractual rent which
Includes the returns on capital investment made by the
Land lords in the forms of wells ,irrigation etc.besides
the use of land.
Ricardian rent is also known as PURE RENT.

6. According to the modern theory of rent ,the rent is
the difference between its actual earnings and
transfer earnings.
RENT=PRESENT –TRANSFER EARNINGS.
Suppose the cotton cultivation in a particular area
the yield is RS.15,000.If the same area is put into
its next best use namely paddy cultivation ,the yield
will be of RS.12,000.
RENT=15,000-12,000
=3,000.

7. It is defined as the price paid for the services
rendered by the labourer in the production
process.
TYPES OF WAGES:
1.Piece-wage.
2.Time wage.
3.Money wage.
4.Real wage.

8. 1.Subsistence theory of wages.
2.Wages fund theory.
3.Marginal production theory of wages.
4.Demand-Supply theory of wages.
Wage-fund theory
=> It was propounded by J.S.Mill
=> According to this theory wages depend
upon the proportion between population and
capital.
Rate of wage=wage fund/number of workers.

9. According to marginal productivity theory,wages
will be equal to the value of marginal productivity of
labour.It is based on the following assumptions:
1.Assumes the existence of perfect competition.
2.All labours are homogenous in charater.
3.The theory is based on the law of dimnishing
marginal returns.
4.It assumes that diferent factors can substitute
each other.

10. # According to this theory,wages are
determined by the forces of demand and supply.
# when there is a perfect competition in labour
market ,wage rate is determined by the equilibrium
between the demand and supply of labour.
#That is ,there is a positie relationship between
wage rate and supply of labour i.e.,higher the wage
rate ,more will be the supply of labour and vice
versa.

11. Interest is the price for the use of loanable
funds (capital)used in the production process.
Theories of interest:
1.Loanable fund theory of interest.
2.Keynes ‘liquidity preference theory of
interest.
3.Modern theory of interest or Neo-Keynesian
theory of interest

12. According to this theory,rate of interest is
determined by demand and supply of loanable
funds.The supply of loanable funds consist of
1.Dishoarding by people from past savings.
2.Savings of people out of their disposable
income.
3.Disinvestment .
4.Bank credit.
Here the supply curve is upward sloping.In
other words,larger amount of loanable funds will
be available at higher rates of iterest and vice
versa.

13. Interest is the payment made to induce people to
surreder their liquidity.In other words ,”rate of
interest is the reward for parting with liquidity for
a specific period”.
Reasons for liquidity:
1.Transaction motive.
2.pre-cautionary motive.
3.Speculative motive.

14. According to this theory,the four
determinants,namely,
Savings
Investment
Liquidity preference and
Supply of money.
are integrated along with income and
determine the rate of interest.

15. Is curve:
Here the farmer shows the equilibrium in the
real sector or product market.
lm cuve:
Here the farmer shows the equilibrium in the
monetary sector or money sector.

16. Profit is the reward to an entrepreneur for the
functions he renders in productive activity.
Profit is also called a residual income.
Gross profit:
It is the total amount of money that the
entrepreneur gets.
Net profit:
Net profit or the pure profit is the reward for
following the three functions given below
1.Reward for organisation and coordination of
various factors of production .

17. 2.Reward for bearing risk and uncertainities.
3.Reward for introducing new innovations in the
business.

18. Here the profit is determined by the marginal
productivity of entrepreneur.
The main criticism against this theory is that
it does not explain the monopoly profit .

19. *According to professor Hawely,profits are
the rewards of risk taking,which is an important
funtion of an entrepreneur.
*Production is carried on in anticipation of
demand.
*However the risks due to theft,accidental
damages,price changes,labour stike and so on
causes losses.

20. #This theory was propounded by F.H.Knight.
#According to knight ,profit does not arise on
account of foreseeable risk ,sice such risk can
be insured.
#hence risk taking is not the function of the
entrepreneur, but of the insurance companies.