intrinsic differences in the factors themselves and, for labour, by
differences in the cost of acquiring skills and by different non-monetary
advantages of different occupations.
Intrinsic Differences
If various units of a factor have different characteristics, the price that is
paid may differ among these units. If a high level of numeracy is required
to accomplish a task, for example, workers who are good at math will
earn more than workers who are not. If land is to be used for agricultural
purposes, highly fertile land will earn more than poor land. These
differences will persist even in long-run equilibrium.
Acquired Differences
If the fertility of land can be increased only by costly methods, then more
fertile land must command a higher price than less fertile land. If it did
not, landowners would not incur the costs of improving fertility. The
same principle holds true for labour, since it is costly to acquire most
skills. For example, an engineer must train for some time, and unless the
earnings of engineers remain sufficiently above what can be earned in
occupations requiring fewer skills, people will not incur the cost of
training.