13.3 Factor Markets in Action LO 3, 4
Factor-price differentials often occur in competitive markets.
Temporary differentials in the earnings of different units of factors of
production induce factor movements that eventually remove the
differentials. Equilibrium differentials reflect differences among units
of factors as well as non-monetary benefits of different jobs; they can
persist indefinitely.
Factors will be allocated between uses to generate the greatest net
advantage to their owners, allowing for both the monetary and non-
monetary advantages of a particular employment.
Some amount must be paid to a factor to prevent it from moving to
another use. This amount is the factor’s transfer earnings. Economic
rent is the difference between that amount and a factor’s total
earnings.
Whenever the factor’s supply curve is positively sloped, part of the
total payment going to a factor is needed to prevent it from moving to
another use, and part of it is economic rent. The more narrowly
defined the use, the larger the fraction that is transfer earnings and
the smaller the fraction that is economic rent.