We know the demand for labour and its supply, the price determination becomes easy. Just like any other commodity, the wages of labour will be determined at a point where the demand and supply are in equilibrium. The point denoting equilibrium. Therefore wage rate will be fixed at OW where both demand for and supply of lobour is equal to OM. Any deviation for this wage rate would set such forces into operation which would restore that equilibrium at the same wage rate. If wages are fixed at OW1, at this wage rate supply is more than the demand by an amount equal to KL. This would press down the wages similarly, when wages are fixed at OW2, the demand would exceed the supply thus raising the wage rate. Ultimately, therefore, the wages are going to be fixed up at the level OW.
What is true of labour is also true of the other factors of production. The reward of every factor is determined by the market forces of demand and supply of that factor. This is determined by the market forces of demand and supply of that factor. This is the modern theory of distribution which the forces which govern the determination of factor prices.SUBMIT ASSIGNMENT NOW!