Factor Pricing

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Factor Pricing : 

Factor Pricing Presented by:- 1. Priti Uikey(860) 2. Pranali Thote(858) 3.Varshrani lakade(823)

Introduction of topic : 

Introduction of topic Theory of factor pricing. Rent Wages & interest Capital Budgeting

Theory of factor pricing : 

Theory of factor pricing The Theory of Factor Pricing is concerned with the evaluation of the services of the factors of production. It deals with the determination of the share prices of four factors of production, e.g. land, labor, capital and enterprise.

Slide 4: 

A B CC D E Capital Labour Land Commodities Factor-inputs Relation between product theory & factor-input

Price determination in factor market : 

Price determination in factor market The Basic principle of price mechanism is The price of factor service is determined by its demand & supply. Demand for factor service: Demand for factors is a Derived Demand Derived Demand: factor service is demanded not for its own sake but due to demand for good that it produce. Ex: increased demand for s/w solutions results in increased demand for s/w engineers.

Marginal product : 

Marginal product Marginal product can measured both in Physical unit & in term of revenue generated for the firm. Marginal Physical Productivity:(MPP) Addition to total product (in physical unit) due to use of additional unit of variable factor. MPPN= TPPN-TPPN-1 MPPN = ∆TPP ∆ F Where F stand for factor service

Marginal Revenue productivity(MRP) : 

Marginal Revenue productivity(MRP) Addition to the revenue product of firm due to use of additional unit of variable factor. MRPN = ∆TRP ∆ F where TRP= TPP X P MRPN=MPPN X P . In perfect competition p= MR Therefore , In perfect competitive market, MRPN=MPPN X MR

Marginal Revenue curve : 

Marginal Revenue curve 0 Y X ARP MRP Output Quantity of variable inputs

factor demand : 

factor demand Elasticity of Demand for Factors If factor price form small portion of total cost so its demand will be inelastic and vice versa Depends upon the elasticity of demand for commodity. If factor is easily substitutable then demand will be elastic Supply of Factors of Production The supply of factors of production is a complicated topic but still it can be said that the higher the price of a factor of production, other things remaining the same, the greater will be its supply and vice versa.

Rent: : 

Rent: Rental income Economic rent Theory of rent Ricardian theory of rent Modern theory of rent

Rental Income : 

Rental Income

Slide 12: 

The income earned per unit of land or capital. Depending Factors: The level of demand for factor MRP which depend on MPP & demand for good it produces i.e Good’s MR. The elasticity of demand for the good: Demand is less elastic for product whose production the factor is used higher would be rental income ,& vice versa. The elasticity of supply of factor: As supply of factor is less elastic , More factor owner can gain from high demand. economical level is also become high. The total factor supply by other factor owner: As the level of economic rent is higher ,each unit of factor can earn from any given level demand.

Economic Rent : 

Economic Rent Economic rent is nothing but producer’s surplus. Surplus = Actual income – profit or min. income Total return obtained by selling the product of plot of land is more than total cost of cultivation, the owner of land earn surplus income is in nature of economic rent.

Continue…. : 

Continue…. Economic rent’s 3 forms: Differential rent: Difference in quality of different land. Surplus of fertile land is more than less fertile land. Scarcity rent: Supply of factor is less then its demand. Situational Rent: Plot of land possess advantage over other.

Ricardian Theory of rent : 

Ricardian Theory of rent It was Propounded by David Ricardo It believes that rent accrues to superior plot of land that possess some ‘Differential advantages’ like ‘fertility ‘or ‘situation’ over other land . The surplus is define as economic rent. Economic rent arises under extensive & intensive cultivation. In extensive cultivation ,rent arise due to differences in fertility of different plot of land. In intensive cultivation, rent arise due to difference in productivity of different doses of labour & capital .

Modern theory of rent : 

Modern theory of rent Factor –inputs whose supply is not perfectly elastic earn surplus income. Surplus = Actual earning – Transfer earning Actual earning of factor service : Determined by its Market demand & Market Supply. Market price = price where demand and supply is equal. This Market price represents actual earning. Transfer earning of factor service: The price which is necessary to be paid to retain given unit of factor in certain industry. Define by minimum supply price of factor input.

Continue…. : 

Continue…. Type of factor inputs: Specific : Less Use in alternative occupation, supply is limited. Low opportunity cost(transfer earning) but high market price Ex: actors, cricketers Non –specific: Commonly used in any occupations. Low opportunity cost & low market price. Ex: delivery boys.

Economic rent & elasticity of supply : 

Economic rent & elasticity of supply Perfectly elastic supply: ss E dd Q p o Quantity of factor input Price of factor input Actual Earning=Transfer earning Actual earning= OQEP Transfer earning= OQEP

Perfectly Inelastic supply: : 

Perfectly Inelastic supply: E dd Q p o Quantity of factor input Price of factor input Actual Earning=economic rent Actual earning= OQEP Transfer earning= 0 ss

elastic supply: : 

elastic supply: E dd Q p o Quantity of factor input Price of factor input Transfer earning ss Economic rent Economic rent=OQEP-OQET=PET

Wage & Interest : 

Wage & Interest Presented by: Pranali thote(858)


WAGES DEFINITION The payment made for the services of labour is called wages. TYPES OF WAGES Nominal Wage – The amount of money paid to labour as a reward for his service is called nominal wage. Real Wage – The amount of goods and services the labourer can get with his money wage is called the real wage.

Real wage depends upon the following factors :- : 

Real wage depends upon the following factors :- The amt of money wage multiplied by the purchasing power of money. The amt of extra facilities given by the employer. The conditions of services. e.g. length of working period, regularity irregularity of employment, agreeableness or disagreeableness of the environment. The possibility of extra earnings.

Wage Differentials : 

Wage Differentials Wage rates differ as between different occupations, countries and times. Different occupations arise due to following factors:- Agreeableness or disagreeableness of the job The cost of training The regularity of employment Differences in ability Opportunities for spectacular earnings Relative social prestige

Slide 25: 

Wage differentials as between different countries arise due to immobility of labour. Wages differentials as between different times are caused by the differences in the demand and supply conditions.

Wage Theories : 

Wage Theories Different theories of wage determination have been proposed from time to time. Some theories like Subsistence theory, Standard of living theory, Wages fund theory, Marginal productivity theory. But modern economists prefer the demand and supply mechanism.

Demand & Supply Theory : 

Demand & Supply Theory Demand For Labour – the schedule of units of labour that firms would be willing to employ at all conceivable prices during a given time period. Depends upon Following Factors: Derived demand :- Demand for labour is derived from the demand for the commodity which it helps to produce. Productivity of Labour :- A firm demands labour because it contributes to production. Degree of substitutability :- how far capital is a good substitute for labour & the relative prices.

Slide 28: 

Supply Of Labour - the schedule of units of labour that workers would be willing to offer at each conceivable price. Depends upon Following Factors: Economic Factors:- Labour is natural human instinct, hence work is a sacrifice of leisure. Wage is an inducement that makes labour undergo this sacrifice. Non-economic Factors:- Inertia may develop on account of certain non-monetary advantages of some occupations. Size of population and its composition.

Slide 29: 

E Wage-Rate W D S 0 Q X Y Units of labour S D

interest : 

interest DEFINITION Interest is the price which a borrower has to pay for the use of capital. TYPES OF INTEREST Gross Interest – The total amount of money paid by a borrower to the lender for the use of capital is called gross interest. Gross interest contains elements other than the price, like Payment for risk and Payment for effort and inconvenience.

Slide 31: 

Net Interest – Compensation are deducted from the gross interest, and the balance left out is known as net interest. Interest Rate Differentials: Interest rates vary from market to market & types of loans. Responsible Factors For Multiplicity of rates: The money market is not homogenous. According to the period of the loan. According to the nature of the security. Because of differences in demand and supply conditions.

Capital budgeting : 

Capital budgeting Present by: Varashrani lakade(823)

Capital Budgeting : 

Capital Budgeting a process of conceiving, generating, evaluating & selecting the most profitable projects for investing the funds available to the firms. It plays a vital role in assisting most business firms to achieve their various goals, e.g. Profitability growth, stability ,risk reduction, social goals etc.

Concept of Capital Budgeting : 

Concept of Capital Budgeting Capital Budgeting consists of the entire process of planning expenditure whose returns are expected to extend beyond one year. Proposals for capital assets or capital outlays are grouped in the following categories: Replacements. Expansion: additional capacity in existing product lines. Expansion: new product lines. Modernization of investments. Diversification of product lines & markets for producing a new product. Strategic investment proposals. Rent or buy decision, viz., whether to hire machines or buy them for the purpose of production. Important outlays, such as cost of training programmers & revenue generation projects.

Need of Capital Budgeting : 

Need of Capital Budgeting for the future development of the business, visualized in advance. Big economics of plant size may make it desirable to build capacity in anticipation of growth of demand. There is usually a long gestation period between the time the project is planned & the time the plant goes into operation. Sources of capital also usually require several months of advance planning.

Nature of Capital Budgeting Problem : 

Nature of Capital Budgeting Problem The Capital Budgeting problem consists broadly of three questions as follows: How much money will be needed for expenditures in the coming period? How much money will be available? How should the available money be doled out to candidate projects? The first question is that of demand for capital. The second question relates to that of supply of capital. The third question is that of Capital rationing.

Demand for Capital : 

Demand for Capital capital budgeting relates to need or demand for capital. It arises from the demand for goods & services that capital can produce. It refers to the amount which a firm would like to invest, given the cost of capital & the return on investment. It depends on its productivity & its cost. objective of capital expenditures is to make profits. Thus, this problem involves : Anticipated needs: Built-up for smallest operating unit of organization. Built-up as an integral part of annual budgets or general development plans for a longer period.

Demand for Capital(Cont.) : 

Demand for Capital(Cont.) 2. Prospective Profitability: The crucial element in estimating the demand for capital is the prospective yield or the rate of return. Principles are: Source of Productivity: Direct sources are Cost savings & Sales expansion. Individual Project earnings: Future Profits: Appropriate Alternative: Economic Life of an asset: Discounting: Average amount outlay:

Supply of Capital : 

Supply of Capital This problem has two parts: A. How much can be raised internally from depreciation plus retained earnings? B. How much will be obtained by outside financing? i.e. Sources of Capital & Cost of Capital Internal Sources External Sources Sources of Capital

Internal Sources : 

Internal Sources Internal source of capital is firm’s own saving. Internal savings are generated in two ways -by depreciation charges & -by retained earnings. The main task in regard to raising internal funds are: To forecast how much cash will be generated internally. to decide how much cash to pay out in dividends. deciding the amount for long-term investment.

External Sources : 

External Sources The external source of capital supply is Capital market. ways of raising funds from the capital market are- Sales of bonds: The firm’s may borrow funds directly from the capital market by selling some kind of bonds. e.g. mortgage & debenture bonds. Issuing new shares of common stock(or equity shares): a company can raise finance by issuing new common stocks depends, among other things, on liking or disliking of old stockholders. Preferred stocks: preferred stockholders get preferences over common or equity stockholders in the payment of dividend. Convertible securities, direct loans, etc:

Cost of Capital : 

Cost of Capital ratio of prospective earnings per share to the selling price for new share. Capital is a scarce & productive commodity. Every scarce & useful commodity has a price, capital has a price too, termed as cost of capital. It may be explicit or implicit. explicit cost of capital is the interest paid on it. implicit cost is the expected return from the second best use of money capital.

Capital Rationing : 

Capital Rationing Capital Rationing is central in the planning and control of capital expenditures, since demand for funds normally exceeds supply. Capital Rationing arises when the firm sets an absolute limit on the size of its capital budget in any one year and this limit is less than the level of investment that would be undertaken.

Capital Budgeting: Risk & Uncertainty : 

Capital Budgeting: Risk & Uncertainty Concept of Certainty: the decision-maker has perfect knowledge of the environment & the result of whatever decision he might take. Concept of Risk: the storage of knowledge in which each alternative leads to a set of outcomes, each outcome occurring with a probability that is known to the decision–maker. Risk is the chance that the actual outcome may differ from the expected outcome. Concept of Uncertainty: It is a state in which one or more alternatives result in a set of possible specific outcomes whose probabilities are either not known or not meaningful. It is subjective phenomenon. E.g. 1.Life of new plant & future maintenance are unpredictable. 2.Technological changes are highly unpredictable.

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