Marginal Productivity Theory: According to the marginal productivity theory of wages, under the conditions of perfect competition, every worker of same skill and efficiency will receive a wage equal to the value of the marginal product of labor. By the value of marginal product of labor is mean the net addition to the value of the total product of a firm when and additional unit of labor is added. In brief, imperfectly competitive product and input markets, a worker is paid the value of his marginal physical product. Modern Theory of Wages: The modern theory of wages is also known as the demand and supply theory. According to the modern economists, wages are determined by the interaction of the courses of demand for and supply of labor as in the case of a market equilibrium of an ordinary commodity. The marginal productivity theory is criticized by the modern economists on the following rounds. 1. It ignores the supply side of a factor of production. 2. It does not explain the real issue i.e. The determination of the price of a factor of production. Thus, the modern economist uses the forces of demand for and supplies of a factor of production its price.
Marginal productivity means the net addition or net subtraction caused in the total production by employing or withdrawing one unit of production. This theory is based on wrong assumptions that all the units of production are homogenous. For example all the workers ability and efficiency cannot be equal. It is also wrong to assume that the factors of production are close substitute for one another Labor cannot be a perfect substitute capital. This theory assumes that the reward of each factor of production is determined under the conditions of a perfect competition and full employment. While in actual world it is not possible.
It is also wrong to assume that the law of diminishing returns applies to the business organization it is very difficult to measure the marginal production and its value. In this theory demand factor has given much importance while the supply factor has been ignored. While in fact both have an equal importance. Each factor of production works in co-operation with other factors; if one is withdrawn it will disorganize the whole business and may cause a loss.
According to the theory, wages in perfect competition tend to wequal in marginal net product of a labor. It means the netaddition and net subtraction made to the value of total product of a firm when one unit is aded or withdrawn from it.
When an enterprueneur employs a unit of labor, how much he pays to him as wages depend upon addition which he makes to the total revenue of the firm. If addition made to the total revenue by a labor is Rs 5000, the rate of wages will be equal to Rs 5000. the enterprenuer will not pay him more than the return which he contributes to the total production.
According to this theory, the rate of wages paid to thelabor tends to be equal to the marginal net produc of the labor employed at the margin. All units of the labor are of the same rates. This theory assumes that all units of the factors are homogenoues. The factors used can be continously varied. Factors of production are mobile as between various uses. Theory is based on the law of diminishing marginal returns. The theory shows that when the employment increases the wages decline. It is difficult to calculate the marginal productivity of a factor in a most area. The theory assumes that the supply of factor is fixed. This theory is valid under the perfect competition.
If marginal productivity os a factor is more than price of it, there will be more demand for factorand remuneration or salary will rise up to the marginal productivity. If the marginal productivity s less than the price of a factor, so there will be less demand for factor and salary will come down to amrginal productivity
