I am reading "Economic Development with Unlimited Supplies of Labor" by W.A. Lewis and he states that

Though the capitalised sector can be subdivided into islands, it remains a single sector because of the effect of competition in tending to equalise the earnings on capital. The competitive principle does not demand that the same amount of capital per person be employed on each “island,” or that average profit per unit of capital be the same, but only that the marginal profit be the same. Thus, even if marginal profits were the same all round, islands which yield diminishing returns may be more profitable than others, the earliest capitalists having cornered the vantage points.

I know from basic microeconomics that firms will keep producing until marginal cost is equal to marginal revenue. Assuming a competitive market, firms won't be able to control the price (marginal revenue), so marginal profit will be 0 all across the board. Is that what Lewis means?

I am also confused about how competition helps "equalise the earnings on capital" and how "islands which yield diminishing returns may be more profitable than others. Is the answer to the latter question simply that some firms are able to produce with less cost?


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