What Is a Factor Price?

The factor price refers to the cost of using the factor of production or the compensation of the factor. For example, land rent, labor wages, capital interest, management profit, etc.

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When production factors enter the market to allocate resources, they will naturally form capital factor prices, land factor prices, and labor factor prices. The formation and change in the prices of factors of production such as land, labor, and capital have a dual nature.

On the one hand, since the factors of production have been commoditized, their price formation and changes have the nature and prescriptiveness of general commodities, and their price formation and change processes have common features with ordinary commodity price formation and change processes;

On the other hand, although the factors of production are commodities, after all, they are special commodities, and their price formation and changes must have their own characteristics.

The theory of factor price equalization believes that international trade will lead to equalization of the relative and absolute prices of production factors in various countries. International trade will make the relative and absolute returns of homogeneous production factors between different countries necessarily equal.

The factor price determination theory is an important part of the distribution theory, but it does not constitute the entire content.

The distribution of income of social members has a direct relationship with the amount of production factors they provide and the extent of their effects. The amount of income they receive is the level of the price of the factors provided. Therefore, factor price determinism is an important part of income distribution theory. Corresponding to various factors: the price of labor, capital assets, land, and entrepreneurial talent, that is, various incomes are formed: wages, interest, land rent, and profit (normal profit).

The distribution theory also includes the proportion of the income of various factors of production in national income, that is, the study of the differences or equality of income distribution and its causes, and the state's regulation of income distribution and redistribution.

Marginal productivity theory is the main theoretical basis for factor price determination

American economist JB Clark first proposed that under the premise of constant other conditions and diminishing marginal productivity, the price of a factor of production depends on its marginal productivity. Later economists improved Clark's theory, arguing that the price of factor of production depends not only on marginal productivity, but also on other factors, such as the marginal cost of using factors by firms. Only when the marginal cost of using the factor and the marginal productivity (marginal benefit) of the factor are equal, can the manufacturer maximize the profit on the use of the factor. At the same time factor supply is also an important aspect in determining factor prices.

Factor market prices are jointly determined by supply and demand

The market price of factors, like other commodity prices, is also determined by its demand and supply, except that the demand for factors comes from the manufacturer, and the supply of factors is residents, and the demand for and supply of factors is different from The characteristics of general commodity demand and supply, and the supply curve of different factors are different, so it determines the different characteristics of the equilibrium price of different factors.

There are two types of prices for factors of production: source prices and service prices. Source price refers to the price of the service "carrier" (or source) for buying and selling the factors of production; service price refers to the price of the service provided by the buying and selling factors. For example, for land, we can buy out the ownership and use right of the land at one time. This price is the source price; we can also rent other people's land and pay a certain rent every year. This price is the service price. Some sources of production factors and their services can be traded in the market, such as land and capital, which have two prices; some services of factors of production can be traded, and their sources cannot be traded, such as labor, Entrepreneurs can, so there is only the price of the service, not the source price. In order to avoid confusion and for the sake of unity, unless otherwise specified, the element prices mentioned in this chapter refer to the service prices of the elements.

The price of the factor of production constitutes the cost of the manufacturer's production, and also the income of the owner of the factor of production. Therefore, the decision of the price of the factor is also a question of the distribution of national income among the owners of the factor. An important part of it.