Pricing of factors

1. The marginal productivity of factors is taken into account while determining the prices of factors of production. The marginal productive is a value which one additional unit of factor contributes to production. If this value were high, it would be possible to pay higher price to a factor in question while taking decision as to how many units of labour are to be employed, the firm or entrepreneur compares the marginal productivity and price of labour. If the value of marginal productivity of labour were high, he would go for more units of labour and he could earn more profit. 2. The main shortcoming of the law of marginal productivity is that it gives only the explanation of demand for factors. Supply is inelastic in a short period while in the long run supply becomes elastic. Therefore it is to be noted that the price of a factor is determined jointly by demand and supply. As per the general theory of value, demand and supply jointly determine the price of commodity, the price of factor is determined too by demand and supply

Though the process of price determination of a factor is similar to that of a product, there is a difference between demand for a factor and a demand for a product. The demand for product is made by a consumer and demand for a factor is made by an entrepreneur. The consumer gets utility from the direct consumption of a product while demand for a factor by enterpreneur is not the same. He demands units of labour not for his own requirement but he demands it for production of that product for which there is a demand in the market. In this sense, demand for the services of a factor is a derived demand and the demand for a product is a direct demand.

(1) Demand for product produced by factors (2) Quantity of other factors required for production (3) Productivity of factors

When the price of a tractor is to be determined, the total demand, not individual demand for factor is taken into consideration. The slope of a curve of total demand is the same as-the slope of a marginal revenue product of all firms. Any addition in the revenue of the firm on account of an addition of one more unit of labour is called marginal revenue productivity. Similarly, when one more unit of labour is added by keeping other factors constant, the increase in production is known as marginal physical productivity The slope of demand curve of factors has negative slope but as per the law of marginal productivity as more factors are employed, the marginal productivity

Supply of Factor The group of units of factors eligible to be employed in production is called supply of factor. 1. The supply of land is inelastic for the entire society, but for some industries it is subject to change. An offer of high price may be the cause of increase in supply of land. 2. The supply of labour depends on the volume of population and physical distribution of the same and cost of education training. It cannot be categorically said that a worker would work more with higher wage. However, with increase in wages, any one industry can have more labour

Equilibrium of demand and supply

The price is determined only at the point at which both demand curve and supply curve of a factor intersect each other At point B as mentioned in the diagram, both demand and supply are equal and wage rate is OW. At OW1 wage rate demand for factor is less than the supply of it. This will bring two changes as follows : (1) There will be competition between labourers who sell their labour (2) Wage rate will reduce to OW.

On the other hand, at OW2 wage rate, demand is more than supply. It brings in two changes : (i) Entrepreneurs who buy factor will complete among themselves. (ii) Wage rate will increase up to OW. Finally, at OW wage rate, both demand and supply are equal. This is equilibrium price for Factor