Equilibrium of Demand and Supply
Now. we have worked our way to the demand curve and the supply curve of a factor of production. Both these curves are needed fur the determination of the price of a. productive service. That price will tend to prevail in the factor market at which the demand and supply are in equilibrium. This equilibrium is at the point of intersection of the demand and supply curves.
In the diagram 31.6. they intersect at the point R and the price of the factory will he OW (= MR). At OW’ wuge demand W’ M’ is less than the supply W’ L’. Hence. the competition among the sellers of the service will tend to bring down the price to OW. On the other hand, at OW” price, the demand W” ” is greater than the supply W” M”; hence price will tend to go up to OW at which the demand and supply will be equal.
This is how price of a factor of production in the factor market is determined by the interaction of the forces of demand and supply relating to that factor of production. The modern economists consider this theory as a satisfactory theory of distribution.