In production, when the price of capital changes due to the relative change in labor than capital becomes cheaper and labor dearer. The capitalist then substitute the cheaper one for the costlier one.
Figure 11.4, 11.5,11.6
In the figure 11.4 shows the VMPL curve, which is MPL multiplied by price of the output. The curve is diminishing which shows that the amount capitalist will add to increase his revenue by hiring one more labor at different levels of employment.
The figure 11.5(a) shows that in the labor market the part of the labor that will be employed to maximize the firm's profit and it occurs when the marginal product of labor is equal to wage rate. The shaded rectangle area in 11.5(b)shows the total wages paid by the firm.
The figure 11.6 is similar to figure 11.5 except that the former shows the variable factor of production capital that is substitute for labor. The shaded area in 11.5 that shows the wage share is the capital share in 11.6 with similar shaded area.
Diminishing marginal productivity
According to Neo classical economists, it is the addition of one day's work with one unit of labor to have the amount of labor required in the in production of goods and services keeping all other inputs constant.
Price of labor
Price of labor is the sum of the wages given to the employees.
Price of capital, interest rate?
Price of capital is the rate of return that is earned by putting the money in various investment with some risk. Interest rate
Economics as exchange
Economics is considered as exchange due to the rational behavior of the consumers who are interest to maximize their utility using the various factors of production. It means that capitalist sell commodities and consumers buy commodities at equilibrium values.
Explain the differences between profit and interest rate
In neoclassical theory the capitalist buy, sell commodities with the motive of no profit. According to Clark, normal price means no profit. But the capitalist pay wages to the labors who work in various categories . The capitalist also manage to give interest on all the capital used in the business. i.e. it earn that amount of profit but with no return.
Competitive equilibrium supposes to give each factor its worth eliminating the surplus
In competitive equilibrium the capitalist maximizes profit by paying each factor the value of its marginal product and the sell price of the each unit of output is the cost of the product. So the factor payments is equal to the value of goods produce and there is no surplus. In this market exchange increases everyone's utility and all are satisfied thereby giving equal harmony to all.
Why does competitive equilibrium need dei ex machina?
In Neoclassical economist view all income comes from the payments of necessary cost of production. They said that there is no surplus, no reaming and no profit.
Explain the difficulties to measure the physical quantity of capital?
There is difficulty in measuring the physical quantity of capital as capitalist measure the capital in terms of its value so each product produced are measured by their price to the price of other products that together is the stock of capital. This is not according to the marginal productivity of distribution.
How did Clark made capital as object?
According to Clark, capital constitute the instruments of production and it is mostly concrete and material. Hence, he considered capital as object. He also said that capital was an abstraction i.e.
Definition of capital
According to Bohm Bawerk , capital is the process of utility maximization when time is considered in the analysis. He considered the roundabout ways of capital.
How did Bohm Bawerk separate capital out of interest?
Time
According to Bohm Bawerk , time required for producing goods affected people's utilities. If the time period of production of good is longer so for longer time the goods will be required for consumption and so the more production of goods means more utility. Again, if the consumers get goods as soon as they want they will expect more utility and so it means they will consume it for longer period and profitable for the production company.
References
Clark, John Bates. Capital And Its Earnings. New York: Garland Pub., 1988. Print
