Economics Webinar, Part 1
A. Discounting
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.
B. The Marginal Physical Product
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.
C. Marginal Value Product
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.
(1) The Law of Returns
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.
(2) Marginal Physical Product and Average Physical Product
What is the relationship between the APP and MPP? The MPP is the amount of physical product that will be produced with the addition of one unit of a factor, other factors being given. The APP is the ratio of the total product to the total quantity of the variable factor, other factors being given. To illustrate the meanings of APP and MPP, let us consider a hypothetical case in which all units of other factors are constant, and the number of units of one factor is variable.
Paul Prentice on Food Stamps in the WSJ
Paul Prentice, writes in the WSJ‘s letters section, in response to this article:
How Aggressive Foreign Policy Subsidizes American Nut Farmers
A friend cheekily reminds me that today is National Pecan Day and innocently suggests that I might want to “discuss the connection between pecans and the California drought.” True, enough, there’s a connection. But water is just one factor — albeit a large one — propping up the lucrative nature of farming in the California desert. International trade policy is a major subsidy for many growers as well.
7. Production: General Pricing of the Factors
