Principles of Economics- Mankiw (5th) 400

Principles of Economics- Mankiw (5th) 400 - 412 PA R T S I...

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412 PART SIX THE ECONOMICS OF LABOR MARKETS have just seen, the equilibrium rental income at any point in time equals the value of that factor’s marginal product. Therefore, the equilibrium purchase price of a piece of land or capital depends on both the current value of the marginal product and the value of the marginal product expected to prevail in the future. LINKAGES AMONG THE FACTORS OF PRODUCTION We have seen that the price paid to any factor of production—labor, land, or capi- tal—equals the value of the marginal product of that factor. The marginal product of any factor, in turn, depends on the quantity of that factor that is available. Be- cause of diminishing returns, a factor in abundant supply has a low marginal product and thus a low price, and a factor in scarce supply has a high marginal product and a high price. As a result, when the supply of a factor falls, its equilib- rium factor price rises. When the supply of any factor changes, however, the effects are not limited to
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