rise, factors leave the railway industry and enter the airline industry. This
flow of factors is a leftward shift of to and a movement upward
along There is a reduction of factors employed in the railway industry
and an increase in factors employed in the airline industry. The flow of
factors stops when factor prices are again equalized,
The behaviour that causes the erosion of temporary differentials is
summarized in the hypothesis of the maximization of net advantage: The
owners of factors of production will allocate those factors to uses that
maximize the net advantages to themselves, taking both monetary and
non-monetary rewards into consideration. If net advantages were higher
in occupation A than in occupation B, factors would move toward A and
away from B. The increased supply in A and the reduced supply in B
would drive factor earnings down in A and up in B until net advantages
would be equalized, after which no further movement would occur. This
analysis gives rise to the prediction of equal net advantage: In equilibrium,
units of each kind of factor of production will be allocated among
alternative uses in such a way that the net advantages in all uses are
equalized.
A change in the relative price of a factor between two uses will lead to a shift of some units of
that factor to the use for which relative price has increased. This factor mobility will, in turn,
tend to reduce the differential in relative prices.Equilibrium Differentials
Some factor-price differentials persist without generating any forces that
eliminate them. These equilibrium differentials can be explained by
SR SR′
SA.
w′A=w′R.