2 Most SAQ’s of Theories of Distribution Chapter in Inter 1st Year Economics (TS/AP)

4 Marks

SAQ-1 : What are determining factors of real wages? (OR) What are the factors determining Real wages?

Introduction

Real wages are a crucial indicator of a worker’s standard of living, reflecting the amount of goods and services that can be purchased with nominal wages. This section discusses the various factors that influence real wages, impacting the purchasing power and financial health of the wage earner.

Determining Factors of Real Wages

1. Price Level
   • A primary determiner of real wages, the price level affects the purchasing power of money. High price levels reduce purchasing power, leading to lower real wages, even if nominal wages are high. Conversely, low price levels enhance purchasing power, raising real wages.
2. Method of Payment
   • Additional facilities provided by employers, such as housing, medical facilities, transport, and education for children, contribute to higher real wages. The broader the scope of these benefits, the higher the real wages.
3. Regularity of Employment
   • Permanent jobs often assure higher real wages due to job security, even if the nominal wage is comparatively low. Temporary or uncertain jobs might offer higher nominal wages but result in lower real wages due to the lack of job security.
4. Nature of Work
   • Jobs involving higher risks or dangers may offer high nominal wages but are considered to have lower real wages due to the occupational hazards and stress involved.
5. Conditions of Work
   • Work environments with better facilities and conditions — such as proper ventilation, reasonable working hours, and recreational facilities — contribute to higher real wages by enhancing the overall wellbeing and satisfaction of workers.
6. Subsidiary Earnings
   • Additional income earned beyond regular wages contributes to higher real wages. For instance, a government doctor practicing privately can augment their real wages with extra income.
7. Future Prospects
   • Jobs offering clear opportunities for career advancement, promotions, and wage increments positively impact real wages by providing long-term financial and job security.
8. Timely Payment
   • Regular and timely payment of wages ensures higher real wages as it contributes to financial stability and the ability to manage expenses effectively.
9. Social Prestige
   • Jobs associated with higher social status can be deemed to have higher real wages due to the societal recognition and respect they command, even if the monetary compensation is equivalent to other professions.
10. Period and Expenses of Education
    • The time and financial investment in education also influence real wages. Positions requiring extensive education may offer higher nominal wages but can be associated with lower real wages once the educational investment is considered.

Summary

Understanding the factors that determine real wages is essential for assessing the true financial value and impact of wages on workers’ lives. These factors, ranging from the price level to social prestige, play a vital role in reflecting the actual economic status and purchasing power of employees.

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SAQ-2 : Point out the assumptions and limitations of marginal productivity theory.

Introduction

The Marginal Productivity Theory posits that a factor of production is paid a price equal to its marginal product. This theory is foundational to understanding labor and capital markets but is built upon certain assumptions and has specific limitations.

Assumptions of Marginal Productivity Theory

1. Perfect Competition: The theory assumes perfect competition in both factor and product markets, where buyers and sellers cannot influence the prices, and perfect information is available to all participants.
2. Homogeneous Factors: All units of a factor are identical, implying that each unit of a factor, such as labor or capital, contributes equally to production.
3. Full Employment: It is assumed that all factors of production are fully employed, meaning there’s no unemployment or underemployment in the market.
4. Factors are Perfectly Divisible and Mobile: Factors can be divided into smaller units, and they can move freely between different uses and regions.
5. No Change in Technology: The theory assumes that technology remains constant, ensuring that productivity is unchanged.

Limitations of Marginal Productivity Theory

1. Incomplete Employment of Factors: In real-world scenarios, it’s not always possible to employ all factors completely, challenging the theory’s assumptions.
2. Limited Factor Mobility: Factors are not always perfectly mobile. Specialized factors can be less mobile, limiting their ability to move to their most productive uses.
3. No Possibility of Substitution: The theory’s assumption that factors can be easily substituted is often unrealistic. Some factors cannot be substituted for others in certain production processes.
4. Profit not the Sole Motivation: Not all production and employment decisions are made with profit as the main motivator, contrary to the theory’s assumptions.
5. Indivisibility of Factors: Some factors, especially labor, cannot be perfectly divided into smaller units as assumed by the theory.
6. Not Suitable for Short Run: The Marginal Productivity Theory may not be applicable in the short run as factors may not be able to move or adjust quickly to changes in demand or production conditions.
7. Ignoring Real-World Imperfections: The theory’s reliance on perfect competition and perfect information overlooks the imperfections prevalent in real-world markets.

Summary

In conclusion, while the Marginal Productivity Theory provides valuable insights into factor pricing and employment, its assumptions often do not hold in real-world scenarios. Its significant limitations must be considered for practical application, as they challenge the theory’s applicability in various market conditions.