The elasticity of derived demand, factor substitution, and product demand: Corrections to Hicks' formula and Marshall's Four Rules
AbstractThe concept of the elasticity of substitution between capital and labor, introduced by John Hicks and Joan Robinson over 75Â years ago, has had important implications in labor economics and several areas of economic inquiry. In his The Theory of Wages (1932/1963), Hicks developed a formula that has proven very useful in relating the substitution elasticity to the derived demand for productive factors, the distribution of factor incomes, and Marshall's Four Rules. This short paper shows that the original and subsequent derivations of Hicks' celebrated formula contained a slip (that factor shares are independent of the substitution elasticity and therefore constant), presents a new derivation and a corrected formula, and demonstrates that, with the corrected formula, Marshall's First Rule based on the substitution elasticity is no longer generally valid.
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Bibliographic InfoArticle provided by Elsevier in its journal Labour Economics.
Volume (Year): 18 (2011)
Issue (Month): 5 (October)
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Web page: http://www.elsevier.com/locate/labeco
Derived demand Substitution elasticity Hicks' formula Marshall's Four Rules;
Other versions of this item:
- Robert S. Chirinko & Debdulal Mallick, 2006. "The Elasticity of Derived Demand, FactorSubstitution and Product Demand: Corrections to Hicks’ Formula and Marshall’s Four Rules," CESifo Working Paper Series 1742, CESifo Group Munich.
- A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D33 - Microeconomics - - Distribution - - - Factor Income Distribution
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
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