Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
DETERMINATION OF FACTOR PRICES BY SUPPLY AND DEMAND
Let us suppose that perfect competition prevails in the goods and the factor markets. In such a situation let us see how the price of any factor of production is determined. Each firm takes the market price of the factor as given and determines the quantity demanded at that price from the principle of profit maximization. In this way the demand for any factor by a firm is determined. By the horizontal summation of the demand curves of all firms we can get the market demand curve of that factor. The market demand curve shows how many units of the factor will be demanded at different prices of the factor. As discussed earlier, the market demand curve of a factor is assumed to be downward sloping.
Let us now consider the supply side of the picture. In a perfectly competitive market the suppliers of the factor take the market price of the factor as given and determine the quantity supplied at that price from an optimization process.
Given the market demand and the market supply for any factor of production, its price is determined by the intersection of these two curves. In other words, given the demand and supply curves of a factor, the price of the factor will adjust to the level at which the amount of the factor supplied is equal to the amount demanded. This is shown in fig. 10.5 where DD is the demand curve and SS is the supply curve of the factor. At the price OP, both the demand and the supply of the factor are equal to ON. Hence OP is the equilibrium price of the factor determined at the point of intersection of the factor demand and the factor supply curves.
Figure 10.5
At any other price, demand and supply are not equal. It should be noted that though the price is determined by the demand and the supply curves of the factor, yet it is equal to the VMP (or MRP) of the factor. This is so because any individual firm takes the price OP as given and employs the factor up to that point where the MRP of the factor is equal to its price in order to maximize profit. Thus, in a perfectly competitive market, price of a factor is determined by the demand for and supply of that factor but is equal to the marginal revenue productivity of the factor.
Q. Explain Consumer Price Index? CPI is a price index of a particular basket known as the CPI-basket. CPI-basket comprise essentially all the servicesand goods consumed in a co
Who is considered unemployed?
Consider an economy that having only of those who bake bread and those who make its ingredients. Assume that this economy's production is as follows: 1 million loaves of bread
When did mortgage? Default and housing foreclosure rates begin to rise rapidly? When did the economy go into recession? Was there a causal relationship between the two? Discuss.
The market demand for a factor The market demand curve for any input is not simply the horizontal summation of the individual demand curves of all the firms. This is due to th
What is the use of long-run average total cost curve in the producing output? The long-run average total cost curve demonstrates the relationship in between output and average t
What are the pros and cons of outsourcing in order to keep prices down?
Q. Classical model of the labor market? We begin by explaining the classical model of the labor market. The demand for labor L D is assumed to be inversely re
How much do you have to deposit today in order to allow 5 annual withdrawals, beginning at the end of year 8, with the first withdrawal of $1000 with subsequent withdrawals decreas
The mundelfleming model takes the world interst rate r* as anexogenous variable.Let,consider what happen when this variable changes.a,what maight cause the world interest rate tori
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd