DETERMINATION OF FACTOR PRICES BY SUPPLY AND DEMAND

A full analysis of’ the distribution of income must combine the supply and demand for factors of production: Earlier parts of this section provided the underpinnings for analysis of demand, and gave a brief description of supply.We showed that, for given factor prices, profit-maximizing firms would choose input combinations according to their marginal revenue products. As the price of land falls. each farmer would substitute land for other inputs such as labor, machinery, and fertilizer. Each fanner therefore would show a demand for cornland inputs like that in Figure 12-2(b).

How do we obtain, the market for inputs, (whether cornland, unskilled labor, or computers)? We add together the individual demands of each of the firms. Thus at a given price of land, we add together all the demands for land of all the firms at , that price; and price of land.

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