Role or Factor Prices
Price theory covers hoth product-pricing a factor ncmg So far we have studied product-pricing and now we turn to Iactor Pricing. The factor prices playa key role in the free- enterprise economy. Briefly i’II It is through factor prices that employment level of the arious period cuvc resources arc determined. That IS. how much 01″a factor of production should be utilised in the process of production. A ull in the price or a factor will lead to increase ill its demand and nuu c or it being employed. and vice-versa prices is to allocate the productive resources among the various alternative uses. They signal the resources from the less important to the more important uses. This sort of discrimination will he simply out of the question in the guide lines furnished by the factor prices. (e t As a corollary from the second function, the factor prices not only guide the individual firms regarding the use of resources, they also bring about the most efficient allocation of the resources of the community. Without pricing of factors. optimum utilisation of factors will not be possible. (dl Finally, since we all arc suppliers of one resource or another, [actor-pricing determines the incomes of all of us, i.e.. our respective shares in the national output.
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