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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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  • Robert S. Chirinko
  • Debdulal Mallick

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.

Suggested Citation

  • Robert S. Chirinko & Debdulal Mallick, 2006. "The Elasticity of Derived Demand, Factor Substitution and Product Demand: Corrections to Hicks’ Formula and Marshall’s Four Rules," CESifo Working Paper Series 1742, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1742
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1742.pdf
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    References listed on IDEAS

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    1. M. Bronfenbrenner, 1961. "Notes On The Elasticity Of Derived Demand," Oxford Economic Papers, Oxford University Press, vol. 13(3), pages 254-261.
    2. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, January.
    3. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 1-37, March.
    4. 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.
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    Cited by:

    1. Robert S. Chirinko & Daniel J. Wilson, 2010. "State business taxes and investment: state-by-state simulations," Economic Review, Federal Reserve Bank of San Francisco, pages 13-28.

    More about this item

    Keywords

    derived demand; substitution elasticity; John Hicks;

    JEL classification:

    • 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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