Grade 10 Economics||Theory of Factor Pricing||Notes

Unit 1: Introduction to Factor Pricing

1.1 Definition

Factor Pricing refers to the determination of prices/remuneration for factors of production:

1. Land → Rent
2. Labour → Wages
3. Capital → Interest
4. Entrepreneurship → Profit

Unit 2: Wages

2.1 Definition of Wages

Wages are payments made to workers for their labour services.

Types of Wages:

2.2 Subsistence Theory of Wages (Iron Law of Wages)

• Propounded by: David Ricardo, Ferdinand Lassalle
• Main Idea: In long run, wages tend to settle at subsistence level (minimum needed for survival)
• Process:
  → If wages > subsistence → Population increases → Labour supply increases → Wages fall
  → If wages < subsistence → Population decreases → Labour supply decreases → Wages rise
• Criticisms:

1. Assumes population depends only on wages
2. Ignores role of trade unions
3. Doesn't consider differences in skills/abilities

Unit 3: Interest

3.1 Definition of Interest

Interest is payment for using capital or loanable funds.

Types of Interest:

3.2 Classical Theory of Interest

Propounded by: Alfred Marshall, A.C. Pigou

Main Idea: Interest determined by demand for capital (investment) and supply of capital (saving)

Equilibrium: Where Demand for Capital = Supply of Capital

Diagram:

Equilibrium Interest Rate: 4%

Equilibrium Capital: 150 units

Unit 4: Profit

4.1 Definition of Profit

Profit is the reward for entrepreneurship and risk-taking.

Types of Profit:

4.2 Risk and Uncertainty Theory of Profit

• Propounded by: Frank H. Knight
• Main Idea: Profit is reward for bearing uninsurable risks (uncertainty)
• Two types of risks:

1. Insurable risks (Fire, theft) → No profit
2. Uninsurable risks (Market changes, new competition) → Source of profit

• Criticisms:

1. Profit arises from other factors too (innovation, monopoly)
2. Some risks can be insured

Unit 5: Rent

5.1 Definition of Rent

Rent is payment for using land or any factor whose supply is fixed.

Types of Rent:

5.2 Ricardian Theory of Rent

• Propounded by: David Ricardo
• Main Ideas:

1. Rent arises due to difference in fertility of land
2. No-rent land exists (marginal land)
3. Rent = Produce of superior land - Produce of marginal land
4. Rent is price-determined, not price-determining

Ricardo's Example:

Diagram:

• C = Marginal land (no rent)
• Rent of A = 50-30 = 20 quintals
• Rent of B = 40-30 = 10 quintals

Criticisms of Ricardian Theory:

1. Assumes original fertility (ignores improvements)
2. Assumes perfect competition
3. Neglects scarcity value of land

Key Concepts & Definitions

1. Factor Pricing: Determining payments to factors of production
2. Subsistence Wage: Minimum wage for survival
3. Pure Interest: Payment for capital use only
4. Economic Rent: Payment above opportunity cost
5. Net Profit: Reward for risk and innovation
6. Marginal Land: Land that yields no rent
7. Transfer Earnings: Minimum payment to keep factor in current use

Important Formulas

1. Real Wage = (Money Wage ÷ Price Index) × 100
2. Gross Interest = Pure Interest + Risk premium + Management cost
3. Economic Rent = Actual earnings - Transfer earnings
4. Net Profit = Gross profit - Implicit costs

Comparison Table