One category has been purposely omitted so far from the discussion of land factors. At first, we defined land as the original, nature-given factor. Then we said that land which had been improved by human hands but which is now permanently given must also be considered as land. Land, then, became the catallactically permanent, nonreproducible resource, while capital goods are those that are nonpermanent and therefore must be produced again in order to be replaced.

For purposes of simplification, we have described marginal value product (MVP) as equal to marginal physical product (MPP) times price. Since we have seen that a factor must be used in the region of declining MPP, and since an increased supply of a factor leads to a fall in price, the conclusion of the analysis was that every factor works in an area where increased supply leads to a decline in MVP, and hence in DMVP. The assumption made in the first sentence, however, is not strictly correct.

Of current schools of economic thought, the most fashionable have been the Econometric, the Keynesian, the Institutionalist, and the Neo-Classic. “Neo-Classic” refers to the pattern set by the major economists of the late nineteenth century. The dominant neoclassical strain at present is to be found in the system of Professor Frank Knight, of which the most characteristic feature is an attack on the whole concept of time preference.

If the DMVP schedules determine the prices of nonspecific factor services, what determines the shape and position of the DMVP schedules? In the first place, by definition it is clear that the DMVP schedule is the MVP schedule for that factor discounted. There is no mystery about the discounting; as we have stated, the MVP of the factor is discounted in accordance with the going pure rate of interest on the market. The relation of the MVP schedule and the DMVP schedule may be diagrammed as in Figure 57.

What, then, determines the position and shape of the MVP schedule? What is the marginal value product? It is the amount of revenue intake attributable to a unit of a factor. And this revenue depends on two elements: (1) the physical product produced and (2) the price of that product. If one hour of factor X is estimated by the market to produce a value of 20 gold ounces, this might be because one hour produces 20 units of the physical product, which are sold at a price of one gold ounce per unit.

As we have seen, the MVP for any factor is its MPP multiplied by the selling price of its product. We have just concluded that every factor will be employed in its region of diminishing marginal physical product in each process of production. What will be the shape of the marginal value product schedule? As the supply of a factor increases, and other factors remain the same, it follows that the total physical output of the product is greater. A greater stock, given the consumers’ demand curve, will lead to a lowering of the market price.

In order to investigate the MPP schedule further, let us recall the law of returns, set forth in chapter 1. According to the law of returns, an eternal truth of human action, if the quantity of one factor varies, and the quantities of other factors remain constant, there is a point at which the physical product per factor is at a maximum. Physical product per factor may be termed the average physical product (APP). The law further states that with either a lesser or a greater supply of the factor the APP must be lower. We may diagram a typical APP curve as in Figure 58.