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The Elasticity of Derived Demand, Factor Substitution and Product Demand: Corrections to Hicks’ Formula and Marshall’s Four Rules

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Author Info
Robert Chirinko ()
Debdulal Mallick

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Abstract

Nearly 75 years ago, John Hicks introduced and formalized the concept of the elasticity of substitution between capital and labour and its relation to derived demand. The resulting formula has proven very useful in understanding the derived demand for productive factors, the distribution of factor incomes, and Marshall's Four Rules. This short paper notes that a slip occurred in the original derivation, presents a modified formula, and shows that Marshall's First Rule is no longer generally valid.

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File URL: http://www.cesifo-group.de/DocCIDL/cesifo1_wp1742.pdf
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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1742.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1742

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Related research
Keywords: derived demand; substitution elasticity; John Hicks;

Find related papers by JEL classification:
A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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  1. Mario García Molina, 2005. "Capital theory and the origins of the elasticity of substitution (1932--35)," Cambridge Journal of Economics, Oxford University Press, vol. 29(3), pages 423-437, May. [Downloadable!] (restricted)
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