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3. (a) (i) Explain the following terms in relation to a factor of production: • Supply Price; • Transfer Earnings - Leaving Cert Economics - Question 3 - 2012
Question 3
3. (a) (i) Explain the following terms in relation to a factor of production: • Supply Price; • Transfer Earnings. (ii) Explain the concept Economic Rent and... show full transcript
Worked Solution & Example Answer:3. (a) (i) Explain the following terms in relation to a factor of production: • Supply Price; • Transfer Earnings - Leaving Cert Economics - Question 3 - 2012
Step 1
Explain the following terms in relation to a factor of production: Supply Price;
Answer
The Supply Price is defined as the minimum payment required to engage a factor of production and maintain it in its assigned use. This payment ensures that the factor remains productive in its current application instead of seeking alternative uses, influencing the allocation of resources in the economy.
Step 2
Explain the following terms in relation to a factor of production: Transfer Earnings.
Answer
Transfer Earnings refer to the income that a factor of production would earn in its next best alternative employment. This concept is critical in understanding opportunity costs, as it represents the minimum earnings necessary to retain the factor in its current employment and prevent its transfer to a more lucrative opportunity.
Step 3
Explain the concept Economic Rent and outline two circumstances under which a factor of production can earn it.
Answer
The term Economic Rent refers to any income that exceeds the supply price or transfer earnings of a factor of production. It is essentially a surplus earned that is not necessary to retain the factor in its current use. Economic rent arises when factors of production are in limited supply or their unique qualities command higher prices.
Circumstances under which a factor of production can earn Economic Rent:
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Shortage in the supply of any factor of production: When there is limited availability of a factor, its price will naturally rise. For instance, if land or labor is scarce, the prices they command will increase.
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Possession of a rare skill or talent: If an individual possesses a unique skill that is in high demand, such as a professional soccer player, they can command premium payments. This could lead to earnings that exceed what they would earn in less desirable roles.