The following points highlight the top six features of factor pricing. The features are: 1. Derived Demand 2. Joint Demand 3. Difficulties in Changing Factor Supply 4. No Full Control Over the Factor Supply 5. A Separate Theory for Each Factor 6. No Homogeneous Units of a Factor.
Feature # 1. Derived Demand:
It is observed that the demand for a factor, unlike the demand for a commodity, is a derived demand. It means that the demand for any factor of production depends on the existence of a demand for the goods that it helps to make. Thus the demand for computer programmers or TV repairers is growing, as more and more electronic computers or TV sets are used. The demand for college teachers increases whenever the number of students in colleges increases.
Feature # 2. Joint Demand:
The demand for a factor of production is essentially a case of joint demand. It means that as one particular factor cannot produce anything, almost all the factors are demanded jointly and at a time to produce a particular thing. But, the goods are not jointly demanded except in the case of some special goods like bread and butter or rubber-stamp and stamp-pad, etc.
Feature # 3. Difficulties in Changing Factor Supply:
The supply of a factor has some peculiarities. The supply of most of the goods can, in general be increased or decreased according to their demand or prices. A rise in the price of a commodity would encourage the producers to produce and supply more of the same.
But any increase in factor price such as rent or wage does not bring about an increase in the supply of land at all or an immediate increase in the supply of labour even. Similarly, a fall in the price of a commodity generally brings about a fall in its supply, but this is not so in the case of land or labour or any other factor.
Feature # 4. No Full Control Over the Factor Supply:
It is also observed the owners of factors do not have full control over the conditions which determine factor supply. Thus the supply of money-capital depends in large measure on the country’s national income, law and order situation, banking system etc. The suppliers of capital or savers do not have any control over these’ conditions. But this characteristic is not normally found in the case of the supply of goods.
Feature # 5. A Separate Theory for Each Factor:
In general no separate theory is needed for determining the prices of different types of goods; a single theory is enough for most of the goods (except for interrelated goods like joint products, etc.). But a separate theory is needed for each and every type of factor earnings, like rent, wages, interest and profits.
Feature # 6. No Homogeneous Units of a Factor:
The different units of a product may be homogeneous, but the units of a factor are not generally so Besides the cost of production of a commodity can easily be determined, but the cost for a factor, land or labour, cannot be so determined.
Owing to the above reasons a separate theory is needed for determining factor prices, but the determination of factor prices becomes more complex than the determination of the prices of goods. This happens so, because in the former case the conditions (i.e., market situations) in both factor and product markets are to be considered at the same time, but in the latter case the prices of goods are determined in different market situations assuming factor-price constant.