Study Guide to Man, Economy, and State with Power and Market
Study Guide to Man, Economy, and State with Power and Market Study Guide to Man, Economy, and State with Power and Market
Chapter 7: Production: General Pricing of the Factors 87 APPENDIX A: Marginal Physical and Marginal Value Product Strictly speaking, it is not true that MVP equals MPP times price. This is because, as the quantity of goods increases, the Law of Demand requires that the price consumers will pay for them declines. In general, then, MVP will be less than MPP times price. To continue with our example from above, suppose that nine workers produce 700 shirts, and that the firm can charge $21 per shirt if it wants consumers to purchase 700 of them. Suppose that hiring a tenth worker will allow a total of 750 shirts to be produced, but that the firm can only charge $20 per shirt if it wants consumers to purchase 750 of them. In this case, the total increase in revenue (from hiring the tenth worker) is only $300 (i.e., $15,000 – $14,700), and not $1,000. Thus the firm would only pay up to $300 to hire the tenth worker (ignoring discounting). In effect, the lower product price is causing the firm to “lose” $1 on the first 700 units, and this offsets the direct $1,000 in revenue attributable to the tenth worker’s MPP. APPENDIX B: Professor Rolph and the Discounted Marginal Productivity Theory Rolph, a follower of Knight, disputes the DMVP approach and instead insists that every productive factor receives its payment directly. For example, workers who begin construction on a factory are paid at the end of the day, in exchange for the “product” that they have produced during the day; there is no discounting involved. However, this begs the question as to why an unfinished factory commands any price at all. It is clearly only because a higher order producer anticipates revenues from lower order producers, who in turn expect to sell goods to final consumers. If the factory turns out to be worthless (perhaps
88 Study Guide to Man, Economy, and State with Power and Market because it is located on a major fault line and is destroyed by an earthquake), it will be clear that the workers really didn’t “produce” anything valuable at all, and were paid on the basis of entrepreneurial error.
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88 <strong>Study</strong> <strong>Guide</strong> <strong>to</strong> <strong>Man</strong>, <strong>Economy</strong>, <strong>and</strong> <strong>State</strong> <strong>with</strong> <strong>Power</strong> <strong>and</strong> <strong>Market</strong><br />
because it is located on a major fault line <strong>and</strong> is destroyed by an<br />
earthquake), it will be clear that the workers really didn’t “produce”<br />
anything valuable at all, <strong>and</strong> were paid on the basis of<br />
entrepreneurial error.
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