Assumptions
The theory of marginal, productivity is based on the following assumptions:
- Factor identity: It assumes that all the units of a factor are exactly alike and so can be substituted to any extent.
- Factors can be substituted: It is assumed that the various factors of production, which help in the production of particular commodity can also be substituted for one another. We can use more of labour or less of land or more of labour and less of capital.
- Perfect mobility of factors: It is assumed that the various factors of production can be moved from one use to another.
- Application of law of diminishing return: The theory rests on the assumption that .the law of diminishing returns applies also to the organization of a business.
- Perfect competition: It is based on the assumption that the reward of each factor of production is determined under conditions, of perfect competition and _ full employment.