Factor pricing

Factor prices are prices like any other: they are set where demand for the factor meets its supply. A competitive firm's demand for labour follows its marginal revenue product: it hires workers while the extra revenue from the last worker exceeds the wage, stopping where the two are equal. Rent, interest and profit have their own theories, but all of them answer one question: what does the factor earn for its contribution at the margin? Worked example: if the marginal product of labour is 5 units and the product price is 10, the value of marginal product is 50, so a competitive firm hires up to the point where the wage equals 50.