The Price of the Factors of Production

We will begin by explaining how the price of the factors of production is determined. First, I will offer a very brief introduction. In a market economy, the price of consumer goods and services is determined based on a social process driven by the force of entrepreneurship, which is the capacity all men and women have to recognize what interests them, what is worthwhile to them, and what they value; that is, to notice the profit opportunities which arise around them and act accordingly to take advantage of them. In a two-sided competition, that process tends to result in a price which lies between what are known as the “subjective valuations of the marginal pairs.” Today, we will consider how a price is determined—not the price of consumer goods and services, but the price of the factors of production involved in the making of consumer goods and services. So, today, we will discuss how the price of what Menger calls “economic goods of higher order,” or factors of production, is determined. We have defined such goods as those which (unlike consumer goods and services) do not directly satisfy human needs, but require the involvement of other productive factors and, in the end, indirectly yield a consumer good, following a production process that takes time. A consumer good would be, for instance, a bottle of mineral water or a movie ticket, and a factor of production would be the manufacturing plant where the bottles of mineral water are filled, or the film projector used to show the movie, or going back further, iron ore extracted from a mine for treatment and conversion into steel, etc.—in short, any stage prior to final consumption.