The price of a factor of production, like that of a consumers' good, is determined by supply and demand. In a free market, therefore, the price of each factor is limited on the one hand by its marginal cost to suppliers. For instance, the marginal disutility of labor (Open Details window) imposes an upper limit on the supply of labor services and a lower limit on their price. Workers will maximize their value scales by selling as many units of labor as possible, as long as the marginal utility of their earnings exceeds the marginal disutility of that labor. They will not offer their labor for a wage insufficient to compensate them for its marginal disutility, however.

On the other hand, the price of a factor is limited by its marginal (money) value, as elaborated further below, to the producers who purchase it for use in the structure of production. In analyzing this marginal value, we need to take into account the degree to which a factor may be depleted during production. Some factors may be depleted ("used up") in a single act of production, while others may be reused several times, many times, or even indefinitely.      Next page


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