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Subsistence Theory In Managerial Economics

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1. a) During the marginal revolution, the “labour theory of value” was replaced by the “marginal utility theory of value”. It applies that value depends on the benefit that a consumer gains when acquiring an additional unit of a good that he already owns in some quantity. Goods have value only in condition of scarcity.
b) Classical economists distinguished between 3 types of income: wages, profits and rent. They focus on the supply side and determine the price from the production costs. Emphasizing that lands have to be cultivated before any town could be established, then a “type of course for manufacturing should be established in order for the town to take part of the exchange”(Adam Smith, 1776, Book III.1.8).The value of a commodity is …show more content…

a) The subsistence theory of wages is strongly related to the population, implying that workers should receive the amount of wage which will be enough to support their subsistence. Moreover it emphasizes on the supply of work force, arguing that it is the main factor that changes wages and forcing them to subsistence level.
b) Both Ricardo and Smith support the theory arguing that in case the labour supply is increased this will lead to a decrease in wages which in time will lead to a decrease in labour supply. If wages are above this subsistence level, people are willing to work more. The supply of labour in turn will increase pushing wages down. If wages are under this subsistence level the labour supply will decrease and employers will be forced to increase wages, reaching subsistence level.
c) Taking into account Marx’s theory he gets rid of the concept “labour” and start using the term “labour power”, arguing that it appears on the market as a commodity. He agrees with the classical economists that over the long term wages do not raise much beyond subsistence level. A difference that can be observed is that Marx went further on defining “subsistence” as: 1) only things which are vital for to the maintenance of a person’s life; 2) including items demanded by workers regarding their socieal or historical environment. He also states that the value of labour is determined by the time necessary for a commodity to be produced, in other words the working …show more content…

Another factor that he points out is the scarcity of the commodity. Therefore he tried to introduce the time element in his theory. The price of the commodity will be higher if the length of the time necessary for its production is greater before it can be brought to market. “He considers (Principles, Ch. I. § 1), that utility is "absolutely essential" to (normal) value though not its measure.” (Marshall, 1890, App I.3) Some of the critics are that: it did not deal with the short run problem; his theory of value is based on unrealistic assumptions; it is focused only on supply side; he neglected the scarcity aspect regarding the value; and depreciation of capita was

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