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The Subsistence Theory of Wages- David Ricardo

The Subsistence Theory of Wages

David Ricardo and Other classical economists developed The Subsistence Theory of Wages, and this theory is based on the population Theory of Thomas Robert Malthus. The theory of wages is known as the "Iron law" of wages. According to this theory, wages are determined by the cost of production of labour or subsistence level. So, the wages predetermined main fixed. In other words, wages remain at a sufficient level in the long run. Wages paid to workers are just sufficient to fulfill their basic needs. Workers don’t have surplus income.

Assumptions
David Ricrdo
a. Population increase at a faster rate.
b. Food production is subject to the law of diminishing returns.
c. There is no existence of trade unions.
d. The cost of production of labour is equal to the subsistence wage.
e. This theory is based on the long-run concept.

If wages rise above the subsistence level, workers' prosperity increases, which encourages workers to marry earlier and start larger families, thus increasing the population. This will increase the supply of workers. Increased competition among workers for jobs causes wages to drop to subsistence levels. Round the blanks from left to right of the previous living wage level.

Likewise, if wages fall below the subsistence level, wages will be low and prosperity will not exist. People will be interested in marriage and birth. They will suffer from malnutrition, disease, starvation, etc. And it can lead to death. and, which leads to a decrease in the size of the population and, therefore, a decrease in the supply of labor. Competition among workers for jobs is reduced, that is, demand for labor exceeds supply, and wages rise to subsistence levels. This is illustrated using rounding down from left to right from the subsistence wage level.


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