Chapter10 TheMarginalistSchool EdgeworthandClark FRANCISY EDGEWORTHJOHNBATESCLARK IndifferenceCurvesandExchangeDuopolyTheoryMarginalVersusAverageProduct 1 FRANCISY EDGEWORTH IndifferenceCurvesandExchange InhisMathematicalPsychics Edgeworthintroducedthenotionof curvesofindifference whichhesaidshowthevariouscombinationsoftwoitemsthatwillyieldanequallevelofutilitytoanindividual Figure10 1Edgeworth sContractCurve ByoverlayingCrusoe sindifferencemaponFriday smap Edgeworthobtainedacontractcurve whichisthelocioftangencypointsofthetwosetsofindifferencecurves HeconcludedthatthepriceofFriday slaborintermsofCrusoe smoneyisindeterminate thatitissubjecttobargaining butthatitwillliesomewherealonglineABC Whyisthisso Edgeworth sansweristhatatallpointsotherthanthoseonthelineABC eitherFridayorCrusoecanaddtohisutilitywithoutlesseningtheutilitygainedbytheotherparty Doesthissameindeterminacyoccurunderconditionsofperfectcompetition Edgeworthcorrectlynotedthatthisisnotthecase undersuchconditionsallthepartiestotrademustacceptthepricesofgoodsandlabordeterminedinthemarket Butinthebilateralmonopolysituation acircumstancewheretherearesinglesellersoneachsideofatransaction thepriceisindeterminate DuopolyTheory Edgeworth sideaofindeterminacyisalsopresentinhistheoryofduopoly InCournot stheory themaximumprofitorreactioncurvesofthetwopartieswouldproduceadeterminateequilibriumprice EdgeworthalteredCournot sassumptionsintwoways First heassumedthatthesellersofthemineralwatereachhavealimitedcapacitytomeetconsumerdemand Second Edgeworthassumedthatintheshortrunthetwosellerscanchargedifferentpricesforthemineralwater Figure10 2Edgeworth sDuopolyModel Figure10 2showstheessenceofEdgeworth stheory AsinCournot smodel marginalcostsinFigure10 2areassumedtobezero thatis theycorrespondwiththehorizontalaxis Edgeworthstatesthateachofthesetwosellersseekstomaximizeitsprofitsbyvaryingitsprice output whileassumingthattheotherparty sprice output willremainatitscurrentlevel Conclusion AccordingtoEdgeworth noequilibriumpriceoroutputexistsinsituationswheretherearenoncollusiveduopolists AnypricebetweenPxandPyinFigure10 2ispossible andthepricemayoscillateupwardanddownward MarginalVersusAverageProduct AfinalsignificantideaaddedbyEdgeworthwashisdistinctionbetweenmarginalandaverageproduct Tomakehispoint Edgeworthassumedthatlandwasthefixedresourceandthatlabor togetherwithtools wasthevariableresource Figure10 3TheRelationshipBetweenTotal Marginal andAverageProduct ContemporarytextbooksillustrateEdgeworth sdistinctionsgraphically Marginalproduct MP isthechangeintotalproductassociatedwithachangeinthelaborinput ItcanbefoundbyusingcalculusorsimplybydrawingastraightlinetangenttotheTPcurveatanypointandthendeterminingtheslopeoftheline Howthenistheaverageproductcurvederived Geometrically itcanbefoundbydrawingastraightlinefromtheorigintoanypointonthetotalproductcurveandthenfindingtheslopeofthelinedrawn Noticethatwhentotalproductisrisingatanincreasingrate marginalproductisrisingandisabovetheaverageproduct Why MarginalProductivityTheoryofDistributionEthicalImplicationsofClark sDistributionTheoryThe Adding Up ProblemandtheReturnstoScale 2 JOHNBATESCLARK MarginalProductivityTheoryofDistribution Clark stheoryofdistributionwasbasedonthelawofdiminishingmarginalreturns Clarkgeneralizedtheideatoallfactorsofproduction Theunderlyingassumptionisthatallotherthings especiallytechnology remainunchanged whileonefactorisvaried Ifcapital land andentrepreneurshiparekeptconstantwhileunitsoflaborareadded themarginalandaverageproductsoflaborultimatelywillfalleventhoughtotaloutputmaycontinuetoincrease Similarly ifcapitalisaddedwhiletheotherfactorsremainconstant themarginalandaverageproductsofcapitaleventuallywillfall Clarkstatedthelawofdiminishingreturnsasfollows Thelasttooladdslesstoman sefficiencythandoearliertools Ifcapitalbeusedinincreasingquantitybyafixedworkingforce itissubjecttoalawofdiminishingproductivity Thediminishingproductivityoflabor whenitisusedinconnectionwithafixedamountofcapital isauniversalphenomenon Theactionofthegenerallaw becomesthebasisofatheoryofdistribution Figure10 5Clark sMarginalProductivityTheory InFigure a TotalWage SAECDTotalOutput SABCDInterest SEBC InFigure b TotalInterest SA E C D ResidualLabor SE B C 1 Profithasnoplaceinsuchstaticconditions Inaperfectlycompetitiveeconomy economicprofitstendtodisappearatbothendsoftheproductiveprocess 2 Itispossibleforprofitstoexisttemporarilyastheeconomymovestowardequilibrium Profitsarethenaresidual 3 Clark smarginalproductivitytheoryconcernedwiththedemandforfactorsofproductionsayslittleaboutfactorsupply 4 Clark stheoryofincomedistributionisstatic 5 Intherealworld alegalmonopolymaysecureapermanenteconomicprofitforanentrepreneur 6 Capitalisproductive andthereforeinterestexists EthicalImplicationsofClark sDistributionTheory Clark soverallconclusionfromhismarginalproductivitytheorywasthatthedivisionofthesocialincomeintowages interest andprofitis inprinciple equitable Societyisnotatlibertytoviolatethe fixedlawsofdistribution Ifallpeoplerece