WEBVTT NOTE 7.01 Imputation of the Discounted Marginal Value Product 1 00:00:00.000 --> 00:00:06.000 Chapter 7. Production. General Pricing of the Factors. 2 00:00:06.000 --> 00:00:12.000 1. Imputation of the Discounted Marginal Value Product. 3 00:00:12.000 --> 00:00:21.000 Up to this point we have been investigating the rate of interest as it would be determined in the evenly rotating economy, 4 00:00:21.000 --> 00:00:26.000 that is, as it always tends to be determined in the real world. 5 00:00:26.000 --> 00:00:32.000 Now, we shall investigate the pricing of the various factors of production in the same 6 00:00:32.000 --> 00:00:39.080 terms, that is, as they tend to be in the real world and as they would be in the evenly 7 00:00:39.080 --> 00:00:41.500 rotating economy. 8 00:00:41.500 --> 00:00:46.560 Whenever we have touched on the pricing of productive factors, we have signified the 9 00:00:46.560 --> 00:00:51.540 prices of their unit services, that is, their rents. 10 00:00:51.540 --> 00:00:58.340 In order to set aside consideration of the pricing of the factors as wholes, as embodiments 11 00:00:58.340 --> 00:01:04.580 of a series of future unit services, we have been assuming that no businessmen purchase 12 00:01:04.580 --> 00:01:13.140 factors, whether land, labor, or capital goods outright, but only unit services of these 13 00:01:13.140 --> 00:01:14.140 factors. 14 00:01:14.140 --> 00:01:17.640 This assumption will be continued for the time being. 15 00:01:17.640 --> 00:01:24.480 Later on we shall drop this restrictive assumption and consider the pricing of whole factors. 16 00:01:24.480 --> 00:01:31.120 In Chapter 5 we saw that when all factors are specific there is no principle of pricing 17 00:01:31.120 --> 00:01:33.440 that we can offer. 18 00:01:33.440 --> 00:01:38.520 Practically the only thing that economic analysis can say about the pricing of the productive 19 00:01:38.520 --> 00:01:46.440 factors in such a case is that voluntary bargaining among the factor owners will settle the issue. 20 00:01:46.440 --> 00:01:53.240 As long as the factors are all purely specific, economic analysis can say little more about 21 00:01:53.240 --> 00:01:55.880 the determinants of their pricing. 22 00:01:55.880 --> 00:02:02.220 What conditions must apply then to enable us to be more definite about the pricing of 23 00:02:02.220 --> 00:02:03.420 factors? 24 00:02:03.420 --> 00:02:09.500 The currently fashionable account of this subject hinges on the fixity or variability 25 00:02:09.500 --> 00:02:15.820 in the proportions of the combined factors used per unit of product. 26 00:02:15.820 --> 00:02:22.560 If the factors can be combined only in certain fixed proportions to produce a given quantity 27 00:02:22.560 --> 00:02:28.500 of product, it is alleged, then there can be no determinate price. 28 00:02:28.500 --> 00:02:34.940 If the proportions of the factors can be varied to produce a given result, then the pricing 29 00:02:34.940 --> 00:02:38.980 of each factor can be isolated and determined. 30 00:02:38.980 --> 00:02:41.660 Let us examine this contention. 31 00:02:41.660 --> 00:02:48.520 Suppose that a product worth 20 gold ounces is produced by three factors, each one purely 32 00:02:48.520 --> 00:02:51.540 specific to this production. 33 00:02:51.540 --> 00:02:57.340 Suppose that the proportions are variable, so that a product worth 20 gold ounces can 34 00:02:57.340 --> 00:03:05.140 be produced either by four units of factor A, five units of factor B, and three units 35 00:03:05.140 --> 00:03:35.140 The Theory of Money and Credit 36 00:03:35.140 --> 00:03:59.140 The Fallacious Emphasis on Variability of Proportion as the Basis for Factor Pricing in the Current Literature is a result of the prevailing method of analysis. 37 00:03:59.140 --> 00:04:07.140 A typical single firm is considered, with its selling prices and prices of factors given. 38 00:04:07.140 --> 00:04:12.140 Then the proportions of the factors are assumed to be variable. 39 00:04:12.140 --> 00:04:19.140 It can be shown accordingly that if the price of factor A increases compared to B, 40 00:04:19.140 --> 00:04:25.140 the firm will use less of A and more of B in producing its product. 41 00:04:25.140 --> 00:04:33.420 From this, demand for each factor is deduced, and the pricing of each factor established. 42 00:04:33.420 --> 00:04:36.700 The fallacies of this approach are numerous. 43 00:04:36.700 --> 00:04:43.740 The chief error is that of basing a causal explanation of factor pricing on the assumption 44 00:04:43.740 --> 00:04:46.500 of given factor prices. 45 00:04:46.500 --> 00:04:53.320 On the contrary, we cannot explain factor prices while assuming them as given from the 46 00:04:53.320 --> 00:05:03.320 The Mathematical Bent Toward Replacing the Concepts of Cause and Effect by Mutual Determination 47 00:05:03.320 --> 00:05:08.320 has contributed to the willingness to engage in circular reasoning. 48 00:05:08.320 --> 00:05:12.320 It is then assumed that the price of a factor changes. 49 00:05:12.320 --> 00:05:15.320 But how can such a change take place? 50 00:05:15.320 --> 00:05:19.320 In the market there are no uncaused changes. 51 00:05:19.320 --> 00:05:26.200 It is true that this is the way the market looks to a typical firm, but concentration 52 00:05:26.200 --> 00:05:32.460 on a single firm and the reaction of its owner is not the appropriate route to the theory 53 00:05:32.460 --> 00:05:33.960 of production. 54 00:05:33.960 --> 00:05:38.880 On the contrary, it is likely to be misleading, as in this case. 55 00:05:38.880 --> 00:05:44.280 In the current literature, this preoccupation with the single firm, rather than with the 56 00:05:44.280 --> 00:05:51.160 The interrelatedness of firms in the economy has led to the erection of a vastly complicated 57 00:05:51.160 --> 00:05:55.600 and largely valueless edifice of production theory. 58 00:05:55.600 --> 00:06:02.000 The entire discussion of variable and fixed proportions is really technological rather 59 00:06:02.000 --> 00:06:08.960 than economic, and this fact should have alerted those writers who rely on variability as the 60 00:06:08.960 --> 00:06:11.960 key to their explanation of pricing. 61 00:06:11.960 --> 00:06:18.960 Clearly, the longer the period of time, the more variable will factor proportions tend to be. 62 00:06:18.960 --> 00:06:25.960 Technologically, varying amounts of time are needed to rearrange the various factors. 63 00:06:25.960 --> 00:06:36.960 The one technological conclusion that we know purely from praxeology is the Law of Returns, derived at the beginning of Chapter 1. 64 00:06:36.960 --> 00:06:42.800 According to the law of returns, there is an optimum of proportions of factors, given 65 00:06:42.800 --> 00:06:47.360 other factors, in the production of any given product. 66 00:06:47.360 --> 00:06:53.640 This optimum may be the only proportion at which the good can be produced, or it may 67 00:06:53.640 --> 00:06:56.440 be one of many proportions. 68 00:06:56.440 --> 00:07:03.120 The former is the case of fixed proportions, the latter of variable proportions. 69 00:07:03.120 --> 00:07:09.000 Both cases are subsumed under the more general law of returns, and we shall see that our 70 00:07:09.000 --> 00:07:17.160 analysis of factor pricing is based only on this praxeological law, and not on more restrictive 71 00:07:17.160 --> 00:07:20.000 technological assumptions. 72 00:07:20.000 --> 00:07:27.000 The key question, in fact, is not variability, but specificity of factors. 73 00:07:27.000 --> 00:07:33.360 Mises adds the important proviso that if the factors have the same fixed proportions in 74 00:07:33.360 --> 00:07:41.220 all the processes for which they are non-specific, then here too, only bargaining can determine 75 00:07:41.220 --> 00:07:43.040 their prices. 76 00:07:43.040 --> 00:07:50.800 For determinate factor pricing to take place, there must be non-specific factors, factors 77 00:07:50.800 --> 00:07:54.600 that are useful in several production processes. 78 00:07:54.600 --> 00:07:59.780 It is the prices of these non-specific factors that are determinate. 79 00:07:59.780 --> 00:08:07.900 If in any particular case only one factor is specific, then its price is also determined. 80 00:08:07.900 --> 00:08:13.980 It is the residual difference between the sum of the prices of the non-specific factors 81 00:08:13.980 --> 00:08:17.100 and the price of the common product. 82 00:08:17.100 --> 00:08:23.340 When there is more than one specific factor in each process, however, only the cumulative 83 00:08:23.340 --> 00:08:30.580 of Residual Price is determined, and the price of each specific factor singly can be determined 84 00:08:30.580 --> 00:08:33.300 solely by bargaining. 85 00:08:33.300 --> 00:08:39.180 To arrive at the principles of pricing, let us first leap to the conclusion and then trace 86 00:08:39.180 --> 00:08:43.100 the process of arriving at this conclusion. 87 00:08:43.100 --> 00:08:49.660 Every capitalist will attempt to employ a factor, or rather the service of a factor, 88 00:08:49.660 --> 00:08:56.620 at the price that will be at least less than its discounted marginal value product. 89 00:08:56.620 --> 00:09:03.540 The marginal value product is the monetary revenue that may be attributed or imputed 90 00:09:03.540 --> 00:09:06.720 to one service unit of the factor. 91 00:09:06.720 --> 00:09:14.140 It is the marginal value product because the supply of the factor is in discrete units. 92 00:09:14.140 --> 00:09:22.300 This MVP, marginal value product, is discounted by the social rate of time preference, that 93 00:09:22.300 --> 00:09:25.460 is, by the going rate of interest. 94 00:09:25.460 --> 00:09:32.180 Suppose for example that a unit of a factor, say a day's worth of a certain acre of land, 95 00:09:32.180 --> 00:09:38.780 or a day's worth of the effort of a certain labourer, will imputably produce for the firm 96 00:09:38.780 --> 00:09:44.540 A product one year from now that will be sold for 20 gold ounces. 97 00:09:44.540 --> 00:09:48.920 The MVP of this factor is 20 ounces. 98 00:09:48.920 --> 00:09:51.080 But this is a future good. 99 00:09:51.080 --> 00:09:57.120 The present value of the future good, and it is this present value that is now being 100 00:09:57.120 --> 00:10:04.300 purchased, will be equal to the MVP discounted by the going rate of interest. 101 00:10:04.300 --> 00:10:12.640 If the rate of interest is 5%, then the discounted MVP will be equal to 19 ounces. 102 00:10:12.640 --> 00:10:18.440 To the employer, the capitalist then, the maximum amount that the factor unit is now 103 00:10:18.440 --> 00:10:21.220 worth is 19 ounces. 104 00:10:21.220 --> 00:10:28.140 The capitalist will be willing to buy this factor at any price up to 19 ounces. 105 00:10:28.140 --> 00:10:35.640 Now suppose that the capitalist owner or owners of one firm pay for this factor 15 ounces 106 00:10:35.640 --> 00:10:37.040 per unit. 107 00:10:37.040 --> 00:10:43.000 As we shall see in greater detail later on, this means that the capitalist earns a pure 108 00:10:43.000 --> 00:10:50.620 profit of 4 ounces per unit, since he reaps 19 ounces from the final sale. 109 00:10:50.620 --> 00:10:57.000 He obtains 20 ounces on final sale, but 1 ounce is the result of his time preference 110 00:10:57.000 --> 00:11:03.920 Capitalists and Weighting and is not pure profit, 19 ounces is the present value of 111 00:11:03.920 --> 00:11:05.960 his final sale. 112 00:11:05.960 --> 00:11:12.320 But seeing this happen, other entrepreneurs will leap into the breach to reap these profits. 113 00:11:12.320 --> 00:11:18.520 These capitalists will have to bid the factor away from the first capitalist and thus pay 114 00:11:18.520 --> 00:11:23.120 more than 15 ounces, say 17 ounces. 115 00:11:23.120 --> 00:11:32.780 This process continues until the factor earns its full DMVP, discounted marginal value product, 116 00:11:32.780 --> 00:11:35.520 and no pure profits remain. 117 00:11:35.520 --> 00:11:43.640 The result is that in the ERE, every isolable factor will earn its DMVP, and this will be 118 00:11:43.640 --> 00:11:45.260 its price. 119 00:11:45.260 --> 00:11:52.540 As a result, each factor will earn its DMVP, and the capitalist will earn the going rate 120 00:11:52.540 --> 00:11:57.080 of Interest for Purchasing Future Goods with His Savings. 121 00:11:57.080 --> 00:12:04.500 In the ERE, as we have seen, all capitalists will earn the same going rate of interest, 122 00:12:04.500 --> 00:12:07.860 and no pure profit will then be reaped. 123 00:12:07.860 --> 00:12:15.780 The sale price of a good will be necessarily equal to the sum of the DMVPs of its factors, 124 00:12:15.780 --> 00:12:20.200 plus the rate of interest return on the investment. 125 00:12:20.200 --> 00:12:26.900 It is clear that if the marginal value of a specific unit of factor service can be isolated 126 00:12:26.900 --> 00:12:34.300 and determined, then the forces of competition on the market will result in making its price 127 00:12:34.300 --> 00:12:39.360 equal to its DMVP in the ERE. 128 00:12:39.360 --> 00:12:45.600 Any price higher than the discounted marginal value product of a factor service will not 129 00:12:45.600 --> 00:12:48.440 long be paid by a capitalist. 130 00:12:48.440 --> 00:12:55.180 Any price lower will be raised by the competitive actions of entrepreneurs bidding away these 131 00:12:55.180 --> 00:12:58.800 factors through offers of higher prices. 132 00:12:58.800 --> 00:13:04.960 These actions will lead, in the former case, to the disappearance of losses, in the latter, 133 00:13:04.960 --> 00:13:11.660 to the disappearance of pure profit, at which time the ERE is reached. 134 00:13:11.660 --> 00:13:18.060 When a factor is isolable, that is, if its service can be separated out in appraised 135 00:13:18.060 --> 00:13:27.260 value from other factors, then its price will always tend to be set equal to its DMVP. 136 00:13:27.260 --> 00:13:34.280 The factor is clearly not isolable if it must always be combined with some other particular 137 00:13:34.280 --> 00:13:37.260 factor in fixed proportions. 138 00:13:37.260 --> 00:13:43.780 If this happens, then a price can be given only to the cumulative product of the factors, 139 00:13:43.780 --> 00:13:48.140 and the individual price can be determined only through bargaining. 140 00:13:48.140 --> 00:13:55.680 Also, as we have stated, if the factors are all purely specific to the product, then regardless 141 00:13:55.680 --> 00:14:03.300 of any variability in the proportions of their combination, the factors will not be isolable. 142 00:14:03.300 --> 00:14:08.620 It is then the non-specific factors that are directly isolable. 143 00:14:08.620 --> 00:14:15.980 A specific factor is isolable if it is the only specific factor in the combination, in 144 00:14:15.980 --> 00:14:22.220 which case its price is the difference between the price of the product and the sum of the 145 00:14:22.220 --> 00:14:25.300 prices of the non-specific factors. 146 00:14:25.300 --> 00:14:32.380 But by what process does the market isolate and determine the share, the MVP of a certain 147 00:14:32.380 --> 00:14:41.580 Let us refer back to the basic law of utility. 148 00:14:41.580 --> 00:14:46.340 What will be the marginal value of a unit of any good? 149 00:14:46.340 --> 00:14:53.220 It will be equal to the individual's valuation of the end that must remain unattained should 150 00:14:53.220 --> 00:14:55.580 this unit be removed. 151 00:14:55.580 --> 00:15:02.580 If a man possesses 20 units of a good, and the uses served by the good are ranked 1 to 152 00:15:02.580 --> 00:15:10.700 20 on his value scale, 1 being the ordinal highest, then his loss of a unit, regardless 153 00:15:10.700 --> 00:15:18.900 of which end the unit is supplying at present, will mean a loss of the use ranked 20th in 154 00:15:18.900 --> 00:15:26.500 in his scale, therefore the marginal utility of a unit of the good is ranked at 20 on the 155 00:15:26.500 --> 00:15:28.460 person's value scale. 156 00:15:28.460 --> 00:15:35.600 Any further unit to be acquired will satisfy the next highest of the ends not yet being 157 00:15:35.600 --> 00:15:43.520 served, that is, at 21, a rank which will necessarily be lower than the ends already 158 00:15:43.520 --> 00:15:45.100 being served. 159 00:15:45.100 --> 00:15:51.940 The greater the supply of a good then, the lower the value of its marginal utility. 160 00:15:51.940 --> 00:15:56.940 A similar analysis is applicable to a producer's good as well. 161 00:15:56.940 --> 00:16:02.900 A unit of a producer's good will be valued in terms of the revenue that will be lost 162 00:16:02.900 --> 00:16:06.700 should one unit of the good be lost. 163 00:16:06.700 --> 00:16:12.500 This can be determined by an entrepreneur's knowledge of his production function, that 164 00:16:12.500 --> 00:16:30.500 What is the various ways in which factors can technologically be combined to yield certain products and his estimate of the demand of the buyers of his product, that is, the prices that they would be willing to pay for his product. 165 00:16:30.500 --> 00:16:35.500 Suppose now that a firm is combining factors in the following way. 166 00:16:35.500 --> 00:16:46.500 Four units of X plus ten units of Y plus two units of Z produce a product that can be sold for 100 gold ounces. 167 00:16:46.500 --> 00:16:55.500 Now suppose that the entrepreneur estimates that the following would happen if one unit of X were eliminated. 168 00:16:55.500 --> 00:17:05.500 The loss of one unit of X, other factors remaining constant, would result in the loss of 20 gold ounces of gross revenue. 169 00:17:05.500 --> 00:17:13.000 This, then, is the marginal value product of the unit at this position and with this use. 170 00:17:13.000 --> 00:17:24.300 Strictly, we should be dealing with discounted MVPs here, but treating just MVPs at this stage merely simplifies matters. 171 00:17:24.300 --> 00:17:27.300 This process is reversible as well. 172 00:17:27.300 --> 00:17:35.300 Thus, suppose the firm is at present producing in the latter proportions and reaping 80 gold ounces. 173 00:17:35.300 --> 00:17:45.300 If it adds a fourth unit of X to its combination, keeping other quantities constant, it earns 20 more gold ounces, 174 00:17:45.300 --> 00:17:52.300 so that here as well the MVP of this unit is 20 gold ounces. 175 00:17:52.300 --> 00:17:57.820 This example has implicitly assumed a case of variable proportions. 176 00:17:57.820 --> 00:18:01.180 What if the proportions are necessarily fixed? 177 00:18:01.180 --> 00:18:07.980 In that case, the loss of a unit of X would require that proportionate quantities of Y, 178 00:18:07.980 --> 00:18:11.360 Z, etc. be disposed of. 179 00:18:11.360 --> 00:18:17.620 The combination of factors would then be as follows, assuming no price change in the final 180 00:18:17.620 --> 00:18:18.860 product. 181 00:18:18.860 --> 00:18:27.700 The marginal value product of the varying factor would be greater, in this case, 25 gold ounces. 182 00:18:27.700 --> 00:18:34.620 We are here postulating that equal quantities of factors produce equal quantities of results. 183 00:18:34.620 --> 00:18:41.020 The famous question whether this condition actually holds, sometimes phrased in pretentious 184 00:18:41.020 --> 00:18:48.060 mathematical language as whether the production function is linear and homogeneous, is easily 185 00:18:48.060 --> 00:18:55.620 be resolved if we realize that the proposition, equal causes produce equal results, is the 186 00:18:55.620 --> 00:19:03.320 major technological axiom in nature. Any cases that appear to confute this rule only do so 187 00:19:03.320 --> 00:19:11.360 in appearance. In reality, supposed exceptions always involve some indivisibility, where 188 00:19:11.360 --> 00:19:18.800 Where one factor, in effect, cannot change proportionately with other factors. 189 00:19:18.800 --> 00:19:26.240 Let us for the moment ignore the variations in MVP within each production process and 190 00:19:26.240 --> 00:19:32.740 consider only variations in MVP among different processes. 191 00:19:32.740 --> 00:19:40.160 This is basic, since, after all, it is necessary to have a factor usable in more than one production 192 00:20:10.160 --> 00:20:15.880 Specifically, the discounted MVPs can be arrayed in descending order. 193 00:20:15.880 --> 00:20:29.840 For example, for factor X, 25 oz., 24 oz., 22 oz., 21 oz., 20 oz., 19 oz., 18 oz., etc. 194 00:20:29.840 --> 00:20:36.080 Suppose that we begin in the economy with a zero supply of the factor, and then add 195 00:20:36.080 --> 00:20:37.680 one unit. 196 00:20:37.680 --> 00:20:40.720 Where will this one unit be employed? 197 00:20:40.720 --> 00:20:46.520 It is obvious that it will be employed in the use with the highest DMVP. 198 00:20:46.520 --> 00:20:52.260 The reason is that capitalists in the various production processes will compete with one 199 00:20:52.260 --> 00:21:00.040 another for the use of the factor, but the use in which the DMVP is 25 can bid away the 200 00:21:00.040 --> 00:21:06.760 unit of the factor from the other competitors, and it can do this, finally, only by paying 201 00:21:06.760 --> 00:21:15.160 25 gold ounces for the unit. When the second unit of supply arrives in society it goes to the second 202 00:21:15.160 --> 00:21:23.720 highest use and it receives a price of 24 ounces and a similar process occurs as new units of supply 203 00:21:23.720 --> 00:21:32.760 are added. As new supply is added the marginal value product of a unit declines. Conversely, 204 00:21:32.760 --> 00:21:43.760 If the supply of a factor decreases, that is, the total supply in the economy, the marginal value product of a unit increases. 205 00:21:43.760 --> 00:21:56.260 The same laws apply, of course, to the DMVP, since this is just the MVP discounted by a common factor, the market's pure rate of interest. 206 00:21:56.260 --> 00:22:09.260 As supply increases then, more and more of the sheath of available employments for the factor are used, and lower and lower MVPs are tapped. 207 00:22:09.260 --> 00:22:20.260 Let us say that there are 30 units of factor X available in the economy, and that the MVP corresponding to such a supply is 10 ounces. 208 00:22:20.260 --> 00:22:28.760 The price of the 30th unit, then, will tend to be 10 ounces, and will be 10 ounces in the ERE. 209 00:22:28.760 --> 00:22:34.760 This follows from the tendency of the price of a factor to be equal to its MVP. 210 00:22:34.760 --> 00:22:41.260 But now we must recall that there takes place the inexorable tendency in the market 211 00:22:41.260 --> 00:22:47.760 for the price of all units of any good to be uniform throughout its market. 212 00:22:47.760 --> 00:22:52.760 This must apply to a productive factor just as to any other good. 213 00:22:52.760 --> 00:22:59.760 Indeed, this result follows from the very basic law of utility that we have been considering. 214 00:22:59.760 --> 00:23:04.760 For since factor units by definition are interchangeable, 215 00:23:04.760 --> 00:23:10.760 the value of one unit will be equal to the value of every other unit at any one time. 216 00:23:10.760 --> 00:23:19.760 The value of every unit of a good will be equal to the value of the lowest ranking use now served by a unit. 217 00:23:19.760 --> 00:23:25.760 In the present case, every unit of the factor will be priced at 10 gold ounces. 218 00:23:25.760 --> 00:23:33.760 Suppose, for example, that the owner of the factor unit serving the top ranking use in our array 219 00:23:33.760 --> 00:23:39.760 should demand that he receive 24 ounces instead of 10 ounces as his price. 220 00:23:39.760 --> 00:23:46.020 is price. In that case, the capitalist in that line of production can refuse to hire 221 00:23:46.020 --> 00:23:53.160 this factor and instead bid away the unit employed in the lowest ranking use, say by 222 00:23:53.160 --> 00:24:00.160 paying for the latter 10.5 ounces. The only alternative left to the owner of the factor 223 00:24:00.160 --> 00:24:07.080 who had demanded 24 ounces is to replace the other factor in the lowest ranking spot at 224 00:24:07.080 --> 00:24:13.980 at 10 ounces. Effectively, all factors will shift until the prices that they can attain 225 00:24:13.980 --> 00:24:21.720 will be uniform throughout the market for their services. The price of X, then, is determined 226 00:24:21.720 --> 00:24:32.160 at 10 ounces. It is determined by the MVP, or rather the DMVP, of the supply, which decreases 227 00:24:32.160 --> 00:24:46.160 Let us assume that Y is also a non-specific factor, and that Z is a factor specific to the particular process considered. 228 00:24:46.160 --> 00:24:57.160 Let us further assume that by a similar process, the DMVP, and therefore the price of Y, is determined at 2 ounces. 229 00:24:57.160 --> 00:25:05.540 At this point, we must reintroduce the concept of production within each line. 230 00:25:05.540 --> 00:25:11.880 We have been discussing MVPs of factors shifted from one use to another. 231 00:25:11.880 --> 00:25:21.960 In our example, a unit of X may have an MVP or DMVP of 20 ounces in a particular use. 232 00:25:21.960 --> 00:25:29.460 at its price as determined by the MVP of the lowest ranking use for which it is employed 233 00:25:29.460 --> 00:25:31.440 is 10 ounces. 234 00:25:31.440 --> 00:25:38.460 This means that in this use, the capitalist is hiring a factor for 10 ounces which earns 235 00:25:38.460 --> 00:25:41.000 for him 20 ounces. 236 00:25:41.000 --> 00:25:47.740 Spurred on by this profit, he will hire more units of the factor until the MVP in this 237 00:25:47.740 --> 00:25:56.800 This use will equal the MVP in the lowest ranking use, that is, the factor price, 10 ounces. 238 00:25:56.800 --> 00:26:01.540 The same process will occur in regard to each of the other uses. 239 00:26:01.540 --> 00:26:09.860 The tendency will always be then, and this will always obtain in the ERE, for the DMVP 240 00:26:09.860 --> 00:26:14.900 of any factor to be equal in each line of production. 241 00:26:14.900 --> 00:26:21.840 We will see shortly why increased purchase of a factor even within each line will lower 242 00:26:21.840 --> 00:26:26.060 the MVP in that line. 243 00:26:26.060 --> 00:26:33.140 Suppose then that the prices of X and Y are 10 and 2 ounces respectively, and that all 244 00:26:33.140 --> 00:26:41.000 the capitalists have so arranged their production as to equate the DMVP of each factor in each 245 00:26:41.000 --> 00:26:43.920 line with this price. 246 00:26:43.920 --> 00:26:50.960 It is further that the equilibrium point in this particular use is the combination 3X 247 00:26:50.960 --> 00:27:02.680 plus 10Y plus 2Z yields 80 ounces. Substituting the given prices of X and Y, 30 plus 20 plus 248 00:27:02.680 --> 00:27:15.240 2Z yields 80 oz. This means 2Z yields 30 oz. And therefore, Z equals 15 oz. The price 249 00:27:15.240 --> 00:27:24.400 of the specific factor Z residual to the other factors is thereby determined at 15 oz. It 250 00:27:24.400 --> 00:27:30.940 is obvious that the impact of a change in consumer demand on a specific factor will 251 00:27:30.940 --> 00:27:37.180 will be far greater in either direction than it will be on the price of employment of a 252 00:27:37.180 --> 00:27:40.340 non-specific factor. 253 00:27:40.340 --> 00:27:47.660 It is now clear why the temptation in factor price analysis is for the firm to consider 254 00:27:47.660 --> 00:27:54.980 that factor prices are given externally to itself and that it simply varies its production 255 00:27:54.980 --> 00:27:57.540 in accordance with these prices. 256 00:27:57.540 --> 00:28:27.540 However, from an analytic standpoint, it should be evident that the array of MVPs as a whole is the determining factor, and the lowest ranking process in terms of MVP will, through the medium of factor prices, transmit its message, so to speak, to the various firms, each of which will use the factor to such an extent that its DMVP will be brought into alignment with its purpose, 257 00:28:27.540 --> 00:28:36.060 Price, but the ultimate determining factor is the DMVP schedule, not the factor price. 258 00:28:36.060 --> 00:28:43.820 To make the distinction, we may term the full array of all MVPs for a factor the general 259 00:28:43.820 --> 00:28:53.180 DMVP schedule of a factor, while the special array of DMVPs within any particular production 260 00:28:53.180 --> 00:29:01.540 Production Process or Stage we may term the particular DMVP schedule of the factor. 261 00:29:01.540 --> 00:29:09.100 It is the general DMVP schedule that determines the price of the supply of the factor, and 262 00:29:09.100 --> 00:29:17.660 then the particular DMVP schedules within each production process are brought into alignment 263 00:29:17.660 --> 00:29:22.920 so that the DMVPs of the factor equal its price. 264 00:29:22.920 --> 00:29:31.260 The particular MVPs are sub-arrays within the widest array of all the possible alternatives, 265 00:29:31.260 --> 00:29:34.780 the general MVP schedule. 266 00:29:34.780 --> 00:29:40.340 In short, the prices of productive factors are determined as follows. 267 00:29:40.340 --> 00:29:46.500 Where a factor is isolable, its price will tend toward its discounted marginal value 268 00:29:46.500 --> 00:29:52.160 product and will equal its DMVP in the ERE. 269 00:29:52.160 --> 00:30:00.020 A factor will be isolable where it is non-specific, that is, is useful in more than one productive 270 00:30:00.020 --> 00:30:06.180 process, or where it is the only specific factor in a process. 271 00:30:06.180 --> 00:30:14.380 The non-specific factor's price will be set equal to its DMVP as determined by its general 272 00:30:14.380 --> 00:30:22.660 D.M.V.P. schedule, the full possible array of D.M.V.Ps given various units of supply 273 00:30:22.660 --> 00:30:25.580 of the factor in the economy. 274 00:30:25.580 --> 00:30:32.440 Since the most value-productive uses will be chosen first and the least abandoned first, 275 00:30:32.440 --> 00:30:37.580 the general M.V.P. declines as the supply increases. 276 00:30:37.580 --> 00:30:44.340 The various particular MVPs in the various processes will be arranged so as to equal 277 00:30:44.340 --> 00:30:49.620 the factor price set by the general DMVP schedule. 278 00:30:49.620 --> 00:30:57.100 The specific factors imputed DMVP is the residual difference between the price of the product 279 00:30:57.100 --> 00:31:02.020 and the sum of the prices of the non-specific factors. 280 00:31:02.020 --> 00:31:08.140 The marginal utility of a unit of a good is determined by a man's diminishing marginal 281 00:31:08.140 --> 00:31:14.580 utility schedule evaluating a certain supply or stock of that good. 282 00:31:14.580 --> 00:31:20.320 Similarly, the market's establishment of the price of a consumer's good is determined 283 00:31:20.320 --> 00:31:27.520 by the aggregate consumer demand schedules diminishing and the given supply or stock 284 00:31:27.520 --> 00:31:28.740 of a good. 285 00:31:28.740 --> 00:31:34.500 We are now engaged in pursuing the problem still further and in finding the answer to 286 00:31:34.500 --> 00:31:36.740 two general questions. 287 00:31:36.740 --> 00:31:41.820 What determines the prices of factors of production on the market? 288 00:31:41.820 --> 00:31:46.460 And what determines the quantity of goods that will be produced? 289 00:31:46.460 --> 00:31:52.020 We have seen in this section that the price of a factor is determined by its diminishing 290 00:31:52.020 --> 00:32:00.420 In general, discounted marginal value productivity and the given supply, stock, of the factor, 291 00:32:00.420 --> 00:32:01.420 in the economy.