Unit-5 Principles of Factor Pricing POE | BBA First Year
Unit-5 Principles of Factor Pricing POE | BBA First Year

Unit-5 Factor Pricing Principle of Economic | BBA First Year

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Unit-5 Principles of Factor Pricing POE | BBA First Year
Unit-5 Principles of Factor Pricing POE | BBA First Year

Factor Pricing v/s Product Pricing

In the product (consumer goods) market,

  • Consumers or households are the buyers and companies are the sellers. In this market, the goal of buyers is to maximize utility and the goal of sellers is to maximize profit.
  • On the other hand, in the market for factor inputs, firms are buyers and households are sellers. In this market, buyers aim to earn maximum profit and sellers or households seek maximum possible utility through earning optimum income.
  • We must remember that in a factor market, sellers or households do not seek to maximize income by selling inputs. For example, a worker does not want to maximize income by working 24 hours a day, because then he would have no leisure.
  • Since a worker derives utility from both income and leisure, he wants a combination of income and leisure—he wants the combination that maximizes his utility level. This is called optimization of income through which the worker will get maximum (possible) utility.

    Read More-https://pencilchampions.com/unit-4-price-discrimination-poe-bba-first-year/


In a product market

  •  the demand for a good arises from the utility it provides to the buyer – the more utility the buyer receives from the consumption of a good, the greater will be its demand. On the other hand, demand for a factor arises from the demand for the product produced by it.
  • The demand for a factor increases or decreases as the demand for the product increases or decreases. That is, the demand for a factor arises from the demand for the product produced by it. That is why the demand for any factor of production is called derived demand.

The firm uses several together to produce its output.

  • That is why input demand is, in most cases, a joint demand. On the other hand, in case of product demand, in general, one good is demanded singly and not jointly, however, in some cases of complementarity, the goods are demanded jointly.

There is a difference between supply of a good or service

  •  supply Factors of production. With a few exceptions, the supply curve of goods and services is upward sloping to the right, that is, as prices rise or fall, their supply increases or decreases according to the law of supply.
  • But the supplies of all factors of production do not increase or decrease in the same way with their prices. For example, let us first consider the case of land.

2 There is a difference between supply of a good or service

  • Therefore, the law of supply does not apply in the case of land.
  • Furthermore, we can see in the case of labor that the supply of labor of an individual worker does not increase, but falls, as the wage rate increases beyond a certain point. That is, the supply curve of an individual worker’s labor shifts to the right in the initial stages; But, after a certain point, it swings back to the left as the wage rate increases.

3 There is a difference between supply of a good or service

  • Because, after a certain point, as the wage rate increases, and as the worker becomes sufficiently wealthy, he may prefer to work less and rest more.
  • However, we will assume that the aggregate supply curve of labor will, generally, be upward sloping to the right. 
  • We have seen that there are certain peculiarities in the supply of land and labour. Even in the case of supply of capital and entrepreneurial services, we see some peculiarities.

4 There is a difference between supply of a good or service

  •  Even in the field of factor pricing, the principles vary due to different market characteristics. Not only this. Due to differences in the nature of supply of different factors of production, different theories have been formulated for them.

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