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

  • Robert S. Chirinko
  • Debdulal Mallick

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1742.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1742
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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.
  2. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 1-37, 03.
  3. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
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