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

Chirinko, Robert S.; Mallick, Debdulal

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

CESifo Working Paper Series No. 1742

18 Pages Posted: 6 Jul 2006

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Debdulal Mallick

Emory University - Department of Economics

Date Written: June 2006

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.

Keywords: derived demand, substitution elasticity, John Hicks

JEL Classification: D21, D33, J23, A2

Suggested Citation: Suggested Citation

Chirinko, Robert S. and Mallick, Debdulal, The Elasticity of Derived Demand, Factor Substitution and Product Demand: Corrections to Hicks' Formula and Marshall's Four Rules (June 2006). CESifo Working Paper Series No. 1742. Available at SSRN: https://ssrn.com/abstract=914478