Glamor Economics

Chapter 47

Chapter 7 How to allocate resources more rationally—the factor market behind economic operation
Section 1 The Vitality Cell of the National Economy - Factors of Production

If the entire national economy is compared to an organism, then the factors of production are its vital cells and the basic units that make up the national economy.Let's take a look at the following short story to see what factors of production mainly include and how they interact with each other.

At a jewelry auction, a diamond called "Moonlight Lover" caught the attention of customers.It is crystal clear and dazzling, and finally sold for the highest price of 8000 million yuan.Who made this diamond?A lot of people are taking credit.The diamond was unearthed in a mine in South Africa by the fantasy jewelry company.Tony, the boss of Dream Company, said proudly: "When I decided to buy the mining rights of this mine, I thought there must be treasures in it, and now it has come true." My colleagues and I worked hard to dig out this diamond. We worked day and night, searched almost every corner of the mine, and found it with great difficulty." The manufacturer that provided the mining equipment to Dream Company said: " Our company's machinery and equipment are world-class. Without the excavators we provided, they would not have been able to dig this diamond in the 50-meter-deep mine." Finally, an official from the South African government said: "Only in our country's land Such precious diamonds can only be found on the Internet. There are countless mineral resources buried under our land, and entrepreneurs from all over the world are welcome to invest in mining.”

In this story, everyone thinks that they are the most responsible for the production of diamonds. In fact, no one can succeed without either party.They are all providers of factors of production, and of course they get corresponding rewards: those who provide labor get wages, those who provide capital get interest, those who provide land get rent, and those who provide entrepreneurial talent get profits.Wages, interest, land rent, and corporate profits are respectively the prices of the factors of production labor, capital, land, and entrepreneurship.

1.The price of labor - wages

The demand for labor depends on the incremental revenue, the marginal revenue, of the last added worker.The supply of labor depends on the cost of labor, which includes actual cost and psychological cost.The actual cost is the cost of maintaining the necessities of life of the laborers and their families and the cost of cultivating and educating the laborers; the psychological cost is the psychological negative effect brought to the laborers at the expense of the enjoyment of leisure.The level of wages depends on the combined effect of both demand and supply of labor.

2.Price of Capital - Interest

Interest is the reward the money owner gets for giving up current consumption to convert money into capital.Interest depends on the supply and demand of capital.The supply of capital depends on income and the proportion of consumption in income; the demand for capital depends on expectations, that is, people's views on future uncertainties.

3.The price of land - ground rent

The basic characteristics of land are: fixed quantity, completely inelastic to price.The price paid for using the land for a certain period of time is called the rent of the land.Land rent is determined by the demand and supply of land.Since the supply of land is fixed, the supply curve for land is a line perpendicular to the horizontal axis.With the development of the economy, the demand for land continues to increase, which makes the land rent have a rising trend.

4.The Price of Entrepreneurship—Profit

Profit is divided into normal profit and excess profit.Normal profit refers to the income that entrepreneurs may get if they use their resources for other similar ventures.Excess profit is that portion of profit above normal profit, which comes from innovation, risk or monopoly.Innovation is the driving force for social progress, and risks are inevitable, which need to be compensated by excess profits, so the excess profits generated by innovation and risks are reasonable.

[links to related words]

Factors of production refer to the basic factors necessary to maintain the operation of the national economy and the production and operation of market entities.Modern western economics believes that production factors include labor force, land, capital, and entrepreneurial ability.In fact, with the development of science and technology and the establishment of the intellectual property system, technology has also been put into production as a relatively independent factor.These production factors are exchanged in the market to form various production factor prices and their systems.

Pure economic rent Rent is a kind of factor income, and the reduction of its quantity will not cause the reduction of factor supply.The income of many factors, though different from rent on the whole, may have a part of its income similar to rent, that is, if subtracted from the total income of the factor, it will not affect the supply of the factor.We call this part of factor income pure economic rent, also known as economic surplus.

Capital accumulation converts surplus value into capital, that is, the capitalization of surplus value.Capitalists use part of the surplus value exploited from wage labor for personal consumption, and the other part is converted into capital, which is used to purchase additional means of production and labor needed to expand the scale of production.Therefore, surplus value is the source of capital accumulation, and capital accumulation is the precondition for capitalist expanded reproduction.

(End of this chapter)