production, of course. Physical capital and land are also important. Why
does a hectare of farmland in Northern Saskatchewan rent for much less
than a hectare of land in downtown Toronto? Not surprisingly,
understanding why different factors of production earn different
payments requires us to understand both demand-side and supply-side
aspects of the relevant factor markets.
In this chapter we examine the issue of factor pricing and the closely
related issue of factor mobility. We confine ourselves to factor markets
that are perfectly competitive. As a result, the firms we study face given
prices for the factor services they buy. Similarly, owners of factors face a
given price for the factor services they sell.
Dealing first with competitive factor markets allows us to study the
principles of factor-price determination in the simplest context. Once
these principles are understood, it is relatively easy to extend the theory
to more complicated settings, which we do in the next chapter, where we
will study labour markets in more detail.