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Factors Supply
We now tum to the second determinant of factor prices, as said above, the supply of factor also exercises an important influence on the prices of factors. The Clark version of marginal of factors is perfectly inelastic. Therefore in Clark marginal productivity theory takes full employment of productive factors as given and assumes that the supply of factors is perfectly inelastic. Therefore in Clark marginal productivity theory demand for a Clark marginal productivity theory was one sided and viewed factor prices determination mainly from demand side alone. But following we shall spell out the nature of supply of various factors. It is worth mentioning at the very ousted that unlike the demand for factors the nature and dehaviour of supply of various factors is not uniform. We shllexplin in detail the nature of supply of various factors when we make analysis of the pried determination of each factor separately. Here we shall indicate only the broad features of their supply.
Supply of land
Land and labour are called original or primary factors of production as they are not produced in the industries. Land is a free gift from nature and therefore its quantity is fixed by nature. More land cannot be produced in response to greater demand for it. Whatever the rent high or low for the use of land its supply to the economy as a whole remains unchanged. In other words the supply of land to the entire economy does not depend on the price rent for its use. Hence form standpoint of the whole economy the supply of land (which includes natural resources) is perfectly inelastic since for its supply. For the society as who a land has got no cost of production since society did not produced it; it got it free from nature.
The supply of land for a particular crop or industry can be better explained with the help of the concept of transfer or alternative earnings. The transfer earnings of a factor may be defined as the earnings in the next best alternative use. Thus the transfer earnings of a piece of land under wheat is the amount of money earned by it if it is put to the cultivation of cotton assuming the after wheat growing of cotton is the next best use of that piece of land. If that piece of land earns $ 500 under wheat and $ 400 under cotton then $ 400 is the transfer earnings of that piece of land. Now a piece of land will be supplied to a particular use if at least it transfer earnings are paid to it. Ion our present example if the earnings of the prices of land fall below$ 400, then the price of land rent) increase in one particular use the land from other used would be attracted towards it so that the supply of land to the particular use in question would increase. Therefore the supply curve of land to a particular use crop or industry is elastic and slopes upwards from left to right.
Supply of capital
We now turn to the supply of capital which is a produced factor and occupies these days a paramount place in the productive process. Here a distinction must be made between realorphyscial capital goods on the one hand and financial capital or money capital on the other since the nature of the resupply is quite different. Capital goods are produced factors as compared to the primary factors like land and labour which are not produced. Capital gods are produced by firm on the same basis as consumer goods. The nature of supple of consumer goods has been discussed in party IV. The supply of capital goods is determined by the same factors as those which determine the supply of consumer goods. Since capital goods are reproducible the cost of production exercises a significant influence over their supply. If the industry producing a capital good is subject to increasing cost the supply curve of that capital goods will be upward sloping indicating that more of it will be supplied at a higher piece. And if the industry producing a certain capital goods is working under constant cost conditions the more of that capital goodwill be supplied at the same price and therefore its supply curve will be a horizontal straight line. However once the durable capital goods have been produced their supply is independent of their cost. But, over a period of time cost is no doubt a determining factor of their supply.
As regard financial capital the nature of its supply is very complex. The supply of financial capital deepen dustpan the money supply in the economy the savings of the people their willingness to lend it or buy shares and bonds (their liquidity preference ) and the ability as well as willingness of the banks to lend money to businessmen. An increase in the rate of interest has an important effecting the willingness of the people to save more and to accumulate more financial capital. Moreover increase in the rate of interest exercises a strong effect in inducing the people to part with the money capital and lend it to businessmen or buy shares and bonds of companies. In other words the rise in the rate of interest induces people to surrender liquidity and lend it to other which explains intertemporal choice between present consumption and further consumption.
Supply of labour
The supply of labour can be viewed as supply of labour (working hours) of an individual the supply of labour for anindsutry or occupation and supply of labour for the economy as a whole we begin with the analysis of supply of labour (working hours) by an individual. Supply of labour by an individual depends on his choice between work and leisure. Alternative or opportunity cost of working for a periods the sacrifice of leisure by the individual for that time period. It should be noted that leisure is a desirable object which provides satisfaction to the individual. On the other hand work providesincoem to the individual with which he can buy goods and services to satisfy his wants. How much leisure an individual will be willing to sacrifice that the how many hours of work he will do depends on the wage rate. We discuss in the next chapter their choice between work (income) and leisure and therefore the supply of labour in detail with the help of indifference curves.
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Supply of land
Land and labour are called original or primary factors of production as they are not produced in the industries. Land is a free gift from nature and therefore its quantity is fixed by nature. More land cannot be produced in response to greater demand for it. Whatever the rent high or low for the use of land its supply to the economy as a whole remains unchanged. In other words the supply of land to the entire economy does not depend on the price rent for its use. Hence form standpoint of the whole economy the supply of land (which includes natural resources) is perfectly inelastic since for its supply. For the society as who a land has got no cost of production since society did not produced it; it got it free from nature.
The supply of land for a particular crop or industry can be better explained with the help of the concept of transfer or alternative earnings. The transfer earnings of a factor may be defined as the earnings in the next best alternative use. Thus the transfer earnings of a piece of land under wheat is the amount of money earned by it if it is put to the cultivation of cotton assuming the after wheat growing of cotton is the next best use of that piece of land. If that piece of land earns $ 500 under wheat and $ 400 under cotton then $ 400 is the transfer earnings of that piece of land. Now a piece of land will be supplied to a particular use if at least it transfer earnings are paid to it. Ion our present example if the earnings of the prices of land fall below$ 400, then the price of land rent) increase in one particular use the land from other used would be attracted towards it so that the supply of land to the particular use in question would increase. Therefore the supply curve of land to a particular use crop or industry is elastic and slopes upwards from left to right.
Supply of capital
We now turn to the supply of capital which is a produced factor and occupies these days a paramount place in the productive process. Here a distinction must be made between realorphyscial capital goods on the one hand and financial capital or money capital on the other since the nature of the resupply is quite different. Capital goods are produced factors as compared to the primary factors like land and labour which are not produced. Capital gods are produced by firm on the same basis as consumer goods. The nature of supple of consumer goods has been discussed in party IV. The supply of capital goods is determined by the same factors as those which determine the supply of consumer goods. Since capital goods are reproducible the cost of production exercises a significant influence over their supply. If the industry producing a capital good is subject to increasing cost the supply curve of that capital goods will be upward sloping indicating that more of it will be supplied at a higher piece. And if the industry producing a certain capital goods is working under constant cost conditions the more of that capital goodwill be supplied at the same price and therefore its supply curve will be a horizontal straight line. However once the durable capital goods have been produced their supply is independent of their cost. But, over a period of time cost is no doubt a determining factor of their supply.
As regard financial capital the nature of its supply is very complex. The supply of financial capital deepen dustpan the money supply in the economy the savings of the people their willingness to lend it or buy shares and bonds (their liquidity preference ) and the ability as well as willingness of the banks to lend money to businessmen. An increase in the rate of interest has an important effecting the willingness of the people to save more and to accumulate more financial capital. Moreover increase in the rate of interest exercises a strong effect in inducing the people to part with the money capital and lend it to businessmen or buy shares and bonds of companies. In other words the rise in the rate of interest induces people to surrender liquidity and lend it to other which explains intertemporal choice between present consumption and further consumption.
Supply of labour
The supply of labour can be viewed as supply of labour (working hours) of an individual the supply of labour for anindsutry or occupation and supply of labour for the economy as a whole we begin with the analysis of supply of labour (working hours) by an individual. Supply of labour by an individual depends on his choice between work and leisure. Alternative or opportunity cost of working for a periods the sacrifice of leisure by the individual for that time period. It should be noted that leisure is a desirable object which provides satisfaction to the individual. On the other hand work providesincoem to the individual with which he can buy goods and services to satisfy his wants. How much leisure an individual will be willing to sacrifice that the how many hours of work he will do depends on the wage rate. We discuss in the next chapter their choice between work (income) and leisure and therefore the supply of labour in detail with the help of indifference curves.
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