QS Study

Marginal productivity theory is a cornerstone in the analysis of factor markets and the input side of short run production. It provides insight into the demand for factor and production based on the notion that a profit maximizing firm hires inputs based on a comparison between the productivity of the inputs and the cost of the input.

The Marginal productivity theory is true only under certain assumptions which make the theory unrealistic and render it inapplicable to actual conditions. It thus fails to explain the actual reward earned by the factor of production.

We give below the various grounds on which the marginal productivity theory is criticized-

  1. It assumes that all the units of the factor are homogeneous so that any one unit is as good alike they are of varying efficiency: nor are all the units of land similar. The capital equipment is also of different types. Thus, we cannot talk of marginal productivity of factor in general.
  2. It is assured that different tasters are capable of being substantial. For one another, so that at the margin. It is possible to use a little more land or a little more labor or capital etc. If this substitution is not possible, the marginal productivity of the various factors may remain unequal. Actually, it is not always possible to substitute labor for the capital and vice versa. Different factors of production are not close substitutes for one another.
  3. It is assumed that the amount of a particular factor that is used can be continuously varied so that it is possible to apply a little loss of the same factor. If this substitution is not possible, marginal productivity of the various factors may remain unequal. Actually if is not always possible to substitute labor. For capital and vice versa, Different factors of production are not close substitutes for one another.
  4. It is assured that the factors of production are mobile as between various uses. We know that land lacks neither mobility nor are labor nor capital perfectly mobile. Human packages is said to be the lat portable. If a factor cannot be moved from one uses or employment to another, its marginal productivity in the various employment may remain unequal.
  5. The theory is based on the law of diminishing returns as applied to the organization: of a business. This means that other things being equal , a dispassionate increase in the supply of any factor increases total producing at a diminishing rate. We know however that in manufacturing industries the operation of the law of diminishing return is held in check. It is under these assumption that the reward of each of the four factors of production, viz, rent of land , interest on capital, wages of labor. one
  6. The marginal productivity theory has been criticized by Keynes, thus. implication of this theory is that if employment is to be increased, wages should lowered, so that more labor will be employed to make marginal productivity equal to the wage. This argument is fallacious.This may be true in the case of an individual industry on a firm. It can’t apply to the economy as a whole. The total employment in a country depends on effective or aggregate demand and not on the level of wages.
  7. According to marginal productivity theory, marginal productivity determines the reward of a factor of production.