Economics
Factor Prices
Factor prices refer to the payments made to the factors of production, such as labor, capital, land, and entrepreneurship, in return for their contribution to the production process. These payments include wages for labor, interest for capital, rent for land, and profit for entrepreneurship. Factor prices play a crucial role in determining the cost of production and influencing resource allocation in an economy.
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9 Key excerpts on "Factor Prices"
eBook - PDF- Colin Harbury(Author)
- 2014(Publication Date)
- Pergamon(Publisher)
CHAPTER 4 Distribution: Factors of Production and their Prices The study of factors of production plays a double role in economics. It helps to answer two of the main questions referred to at the beginning of this book: (1) how production is best organized (because Factor Prices and productivities lie behind the cost curves of firms) and (2) for whom goods are produced (because the prices of factors of production lie behind the distribution of incomes). Market determination of the prices of factors of production, labour, capital and land, is analysed in a manner closely paralleling that used for the prices of goods and services — by studying the forces of supply and demand. DEMAND The demand for the services of a factor of production is the schedule of quantities which businesses want to buy at varying prices during a period of time. The demand is said to be DERIVED from the value of the goods which a factor produces. It is determined by a factor's productivity and the ease with which it may be substituted for other factors. The elasticity of demand for a factor depends on these influences, on the time allowed for a price change to take effect and on the relative importance of the factor in total costs. The technical efficiency, or productivity, with which factors of production can be combined to produce given outputs (the PRODUCTION FUNCTION) is a basic determinant of the costs of a firm. When the prices of the services of factors are known, a firm is able to select the least cost combination for each level of output. Productivity depends critically upon whether the short period or the long period is under consideration. The short period is defined as that during which at least one of the factors is fixed in supply. As units of a VARIABLE factor are used together with a fixed one, the MARGINAL PHYSICAL PRODUCT (M.P.P.) of the variable factor tends eventually to fall. This phenomenon is known as the LAW OF DIMINISHING RETURNS.
eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
For example, if wages are low and unequal, and unemploy- ment is high, many people will be poor. Factors of production are the broad categories—land, labor, capital, natural resources, and entrepre- neurship—into which we classify the economy’s dif- ferent productive inputs. PRICING THE FACTORS OF PRODUCTION 18 Rent is that portion of the produce of the earth which is paid to the landlord for use of the original and indestructible powers of the soil. DAVID RICARDO (1772–1823) 18-4d An Application of Rent Theory: Salaries of Professional Athletes 18-5 Payments to Business Owners: Are Profits Too High or Too Low? 18-5a What Accounts for Profits? 18-5b Taxing Profits 18-6 Criticisms of Marginal Productivity Theory Appendix Discounting and Present Value C O N T E N T S Puzzle: Why Does a Higher Return to Savings Reduce the Amounts Some People Save? 18-1 The Principle of Marginal Productivity 18-2 Inputs and Their Derived Demand Curves 18-3 Investment, Capital, and Interest 18-3a The Demand for Funds 18-3b The Downward-Sloping Demand Curve for Funds 18-3c The Supply of Funds and the Equilibrium Interest Rate Puzzle Resolved: Target Savers 18-3d The Issue of Usury Laws: Are Interest Rates Too High? 18-4 The Determination of Rent 18-4a Land Rents: Further Analysis 18-4b Generalization: Economic Rent Seeking 18-4c Rent as a Component of an Input’s Compensation Why Does a Higher Return to Savings Reduce the Amounts Some People Save? The rate of interest is the price one obtains by saving some money and lend- ing it to others—for example, lending the money to a bank (by depositing the money into a bank account) or lending the money to a corporation (by buying its bonds). We normally expect that a rise in the interest rate on a loan (like the price of anything else) will reduce the quantity demanded and increase the quantity supplied. In fact, however, many people who save money and lend it to others do just Puzzle Copyright 2020 Cengage Learning.
No longer available |Learn more- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
For example, if wages are low and unequal, and unemploy-ment is high, many people will be poor. Factors of production are the broad categories—land, labor, capital, natural resources, and entrepre-neurship—into which we classify the economy’s dif-ferent productive inputs. PRICING THE FACTORS OF PRODUCTION 18 Rent is that portion of the produce of the earth which is paid to the landlord for use of the original and indestructible powers of the soil. DAVID RICARDO (1772–1823) 18-4d An Application of Rent Theory: Salaries of Professional Athletes 18-5 Payments to Business Owners: Are Profits Too High or Too Low? 18-5a What Accounts for Profits? 18-5b Taxing Profits 18-6 Criticisms of Marginal Productivity Theory Appendix Discounting and Present Value C O N T E N T S Puzzle: Why Does a Higher Return to Savings Reduce the Amounts Some People Save? 18-1 The Principle of Marginal Productivity 18-2 Inputs and Their Derived Demand Curves 18-3 Investment, Capital, and Interest 18-3a The Demand for Funds 18-3b The Downward-Sloping Demand Curve for Funds 18-3c The Supply of Funds and the Equilibrium Interest Rate Puzzle Resolved: Target Savers 18-3d The Issue of Usury Laws: Are Interest Rates Too High? 18-4 The Determination of Rent 18-4a Land Rents: Further Analysis 18-4b Generalization: Economic Rent Seeking 18-4c Rent as a Component of an Input’s Compensation Why Does a Higher Return to Savings Reduce the Amounts Some People Save? The rate of interest is the price one obtains by saving some money and lend-ing it to others—for example, lending the money to a bank (by depositing the money into a bank account) or lending the money to a corporation (by buying its bonds). We normally expect that a rise in the interest rate on a loan (like the price of anything else) will reduce the quantity demanded and increase the quantity supplied. In fact, however, many people who save money and lend it to others do just Puzzle Copyright 2020 Cengage Learning.
eBook - ePubFoundations of Economics
A Christian View
- Ritenour(Author)
- 2010(Publication Date)
- Wipf and Stock(Publisher)
hire here means wages. Our Lord is teaching that those who labor are worthy of their wages. The question that economics helps us to answer in this context is: what determines the wages that a worker is worthy to be paid?An important step toward answering this question is taken by noticing that wages are a specific amount of money paid to workers for a particular labor service. In other words, the wage rate is the price of labor. If someone is paid a wage of $28 per hour for work as a computer programmer, then the price of his labor is $28 per hour. Likewise, if the owner of a coffeehouse rents land and a building for $7,500 per month, then the price of that land and building is $7,500 per month. Once we understand that the wage rate and the rental price for land or capital goods are indeed prices, then how such payments to the owners of land, labor, and capital goods are determined becomes much less mysterious.As it turns out, the prices of factors of production are determined like the prices of consumer goods: through the bargaining of suppliers and demanders. Now, you may be asking yourself, if the prices of factors of production are determined by supply and demand, just like those of consumer goods are, why have a separate chapter devoted to the determination of Factor Prices? After all, there are already two entire chapters devoted to price determination and price changes. This is a reasonable question. It is true that landowners, laborers, and capital goods producers make and sell their goods for the same reason as do makers of consumer goods. They hope to reap a profit. Additionally, the supply curve for sellers of factors of production tells us the same thing as for marketers of consumer goods: the quantity of their product they are willing to sell at any hypothetical price for their product.
eBook - PDFMicroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
But there is much more to say about how income is distributed in a market economy. The market mechanism distributes income through its payments to the factors of production . Everyone owns some potentially usable factors of production—the inputs used in the production process. Many of us have only our own labor; but some of us also have funds that we can lend, land that we can rent, or natural resources that we can sell at prices determined by supply and demand. The distribution of income in a market economy is determined by the prices of the factors of production and by the amounts that are employed. For example, if wages are low and unequal and unemployment is high, obviously many people will be poor. Rent is that portion of the produce of the earth which is paid to the landlord for use of the original and indestructible powers of the soil. DAVID RICARDO (1772–1823) P RICING THE F ACTORS OF P RODUCTION 18 Factors of production are the broad categories—land, labor, capital, exhaustible natural resources, and entrepre-neurship—into which we classify the economy’s dif-ferent productive inputs. Why Does a Higher Return to Savings Reduce the Amounts Some People Save? The rate of interest is the price one obtains by saving some money and lend-ing it to others—for example, lending the money to a bank (by depositing the money into a bank account) or lending the money to a corporation (by buying its bonds). We normally expect that a rise in the price of a loan (like the price of anything else) will reduce the quantity demanded and increase the quan-tity supplied. In fact, many people who save their money and lend it to others do the opposite—they reduce the amount they lend when the rate of interest goes up. How can that make sense? The same puzzle affects other factors of production. For example, when wages, the price of labor, rise, workers often decide to work less, perhaps taking longer vacations.
eBook - PDF- Martha L. Olney(Author)
- 2015(Publication Date)
- Wiley(Publisher)
Chapter 9 Factor Markets How many workers does a business hire? How much does an acre of land sell for? How many machines does a business purchase? These are questions about the markets for the factors of production: labor, land, and physical capital. The answers draw upon the supply and demand model, but with slight twists of language. And the roles have switched: Businesses are the buyers who demand factors of production; households are the sellers who supply factors of production. Let’s look at each of these three markets in turn: labor, land, and physical capital. KEY TERMS AND CONCEPTS • Labor supply • Labor–leisure tradeoff • Wage • Opportunity cost of leisure • Foregone wages • The substitution effect • The income effect • Backward-bending supply curve • Labor supply curve • Marginal revenue product of labor (MRP) • Marginal physical product of labor (MPP) • Derived demand • Marginal revenue product curve • Labor demand curve • Equilibrium or market wage • Equilibrium wage • Labor surplus • Labor shortage • Land supply curve • Marginal revenue product of the land • Physical capital • Buildings • Machinery • Equipment or producer durable goods 118 Labor Supply 119 • Marginal revenue product of capital • Price of capital • Expected rate of return • Interest rates • Investment decision rule • Investment spending • External finance • Internal finance • Investment demand curve • Investment spending • Optimism • Pessimism KEY EQUATIONS • Marginal revenue product • Investment decision rule KEY GRAPHS • Labor market equilibrium • Land market • Investment demand LABOR MARKETS Demand and supply was introduced in Chapter 3. What determines the price of spiral notebooks? Demand and supply. The demand for spiral notebooks captures the behavior of buyers of notebooks. At a higher price, there is a lower quantity demanded. The demand curve slopes down. The supply of spiral notebooks captures the behavior of sellers of notebooks.
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
derived demand .Studying the nature of the demand for and supply of factors of production is important at all levels of production and consumption from a small domestic protected market to the large global market. This is particularly so for the increasingly mobile factors in a globalized world, factors such as international capital and entrepreneurship. The study of the factor market provides an understanding of how the structure of the market affects the demand for factors and, particularly in the case of labour, how income and preferences for leisure/work affect factor supply.14.1.2 Classical vs. modern distribution theory
In the nineteenth century, it was customary for economists to classify productive inputs into three basic categories, namely land, labour and capital. The theory of input pricing for the classicists was therefore a theory of the distribution of income among land owners, wage earners and the owners of capital (capitalists), three economic and social factor supplying classes. Rent, wages and profit were the returns to the three factors respectively. A fourth factor, entrepreneurship, was later introduced.The marginal productivity theory
The modern theory is more general. It takes into account all types of factor inputs and how they receive their remuneration. This is the counterpart to the modern theory of value which was the focus of the earlier chapters. The modern theory is mainly marginalist in nature. Consequently, the modern distribution theory has been given the title of the Marginal Productivity theory
eBook - PDFInnovation and Inequality
How Does Technical Progress Affect Workers?
- Gilles Saint-Paul(Author)
- 2008(Publication Date)
- Princeton University Press(Publisher)
6 1. Which Tools Do We Need? to the other factor, when the relative price of this factor goes up. If one knows the economy’s aggregate inputs, ¯ H 1 and ¯ H 2 , then Factor Prices are determined by the fact that the economy must lie on the FPF, at a point where its slope is precisely equal to − ¯ H 1 / ¯ H 2 . The FPF can also be understood as a zero-profit locus. At point A, Factor Prices are “lower” than on the FPF, and firms make positive profits. The converse occurs at point B, where firms make losses. 1.2 Factor Prices and Income Distribution Once we know Factor Prices, how do we get the distribution of income? Obviously, we just have to apply equation (1.1), but we have to take a stand on how the h i s are determined. If the vector of inputs supplied by workers to the labor market is multidimensional, there is no obvious choice and it depends on the problem at hand. In many cases we will deal with simple models with two categories of workers: skilled and unskilled. In such a case there are two charac-teristics: h 1 and h 2 , which we relabel h and l . An unskilled worker i is endowed with l i units of “labor”—where l i thus potentially differs across workers. A skilled worker is endowed with h i units of “human capital.” Throughout the book, we will denote by w the price of labor and by ω the price of human capital. In such a case, the wage of an unskilled worker is simply equal to wl i , and that of a skilled worker to ωh i . In other cases, workers provide a whole vector of characteristics. Each of these characteristics is a separate input into the production function and is rewarded at its marginal product, independent of the worker’s endowment in other characteristics. In such a case, one just applies (1.1) mechanically. We will refer to this case as the nonspecialization model. Note that while this approach is formally impeccable, from an eco-nomic viewpoint it is somehow controversial. Suppose that there are two characteristics, beauty and strength.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
This ebook is exclusively for this university only. Cannot be resold/distributed. iv. Payment for the Factor Across different Firms As per the concept of more than one commodity equilibrium or Principle of proportionality in the Theory of Consumption, similarly in respect of a firm with reference to employment of more than one factor, we can discuss about producer’s equilibrium. For example, if a labour’s productivity is more in paddy production compared to maize production, he will be shifted or allocated to the paddy enterprise and any labour who contributes more towards the maize production, he will be allocated under maize production. This is assumed earlier that, factors of production are easily mobile across the enterprises or firms. In the firm, the point of equilibrium under short run is given by MRP = MFC X . The same concept of equilibrium is applicable for all the factors employed in the production programme thereby, MRP of factor A= MFC X (= Price) of factor A, MRP of factor B= MFC X (=Price) of factor B, MRP of factor C= MFC X (= Price) of factor C and so on. It is otherwise expressed as, [MRP of factor A/MFC X (= Price) of factor A] = [MRP of factor B/MFC X (= Price) of factor B] = [MRP of factor C/MFC X (= Price) of factor C] and so on. When the above equilibrium is attained with reference to all the factors employed in the production programme then, it ensures LCC of factors. C. Factor Pricing under Imperfect Competition So far, we discussed about factor pricing by assuming perfect market competition both in the factor and product markets. But, the real world is of imperfect competition. So, let us study the factor pricing assuming imperfect competition and we have three different cases as given below, i. When the factor market is perfectly competitive and the product market is imperfectly competitive or monopolistic ii. When there is a monopsony in the factor market and perfect competition in the product market, and iii.
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