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.
A young chef is considering opening his own sushi bar. to do so, he would have to quite his current job, which pays him $20,000 a year , and take over a store building that he owns
Explain why we cannot measure the national product simply by adding up the production of all firms. Why do the economists use real GDP rather than nominal GDP to gauge economic
Money Supply and Monetary Policy All modern societies use money as the medium of exchange. Since money can be exchanged for goods and services it also becomes a financial asse
TRADE LIBERALISATION UNDER WTO: In the Uruguay Round negotiations, India agreed to reduce tariff on a large number of commodities and remove quantitative restrictions (QRs
During the past five decades, there has been a shift in the composition of the federal budget toward more spending on income transfers and health care and a smaller share for natio
Solution of the following question The Nigerian president goodluck jonathan has just returned from Germany and the following economic transactions were obtained thus,use the data t
DIFFICULTIES IN MEASURING THE NATIONAL INCOME There are some conceptual and statistical problems in measuring national product. Some items are excluded from the national incom
Four aspects are interesting when we look at inflation data for Sweden During 1800s, when Sweden was primarily an agricultural society, deflation where almost as common as
If in some country personal consumption expenditures in a specific year are $50 billion, purchases of stocks and bonds are $30 billion, net exports are $-10 billion, government pur
If there is an increase in the popularity of video games and more companies making video games, then the following is true? A) Sales of the games will be uncertain. B) Price will g
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