Land Rent and Economic Rent Understanding Economics Richard

Land Rent and Economic Rent € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 2 Land as a Factor of Production Land is anything provided by nature that helps to create wealth. The two characteristics of land are: 1. It is fixed in supply. 2. It has no cost of production. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 3 This is the price paid for leasing / renting a factor of production – normally land or premises. It is determined simply by the interaction of the supply of and the demand for the factor. However, the supply of land is fixed by nature; therefore, the only variable is demand. Thus it is the demand for land that really determines the rent for land. The demand for land is determined by its MRP. If the MRP of land increases then the demand for land will also increase, thus increasing rent and vice versa. € Commercial Rent £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 4 Rent As the demand for land increases, rent increases Rent S D 3 P 2 P 1 P 3 D 1 D 3 D 2 D 1 As the demand for land decreases, rent decreases D 2 Q Quantity € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 5 Supply Price and Economic Rent The supply price of a factor of production is the minimum payment that must be made to bring a factor of production into existence and to maintain it in that employment. Economic rent is any payment made to a factor of production above its supply price. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 6 Mankind and Economic Rent Economic rent is any payment above the supply price of a factor of production. Land is a gift of nature. Therefore, to mankind in general it has no supply price. Thus, any payment made by mankind for land must be economic rent. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 7 Industries Competing for Land Transfer Cost The transfer cost of a factor of production is the minimum payment that must be made to transfer a factor from one industry or activity to another. If land is to be transferred from one industry to another, then the minimum payment for the land is its transfer cost. This is its supply price. Therefore, only any payment above its transfer cost would constitute economic rent. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 8 The Individual and Economic Rent It is assumed that people act rationally. An individual when acquiring land will pay only the minimum price that guarantees that the land will be supplied to him or her. Thus he or she is paying only its supply price. Therefore, no part of the payment made by an individual for land would constitute economic rent. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 9 Labour and Economic Rent Quasi-rent is economic rent earned by labour in the short run. This happens when the demand for that form of labour is temporarily greater than its supply. Rent of ability is economic rent earned by labour in the long run. It happens when an individual has a unique talent for which there is a great demand. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 10 Enterprise and Economic Rent By definition, normal profit is the supply price of enterprise in the long run. Thus, in the long run supernormal profits must be regarded as economic rent. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 11 High Prices Cause High Rents “Shopkeepers have to charge high prices in this particular area to recoup the high rents that they pay for their premises. ” This is a false statement. These shops are located in fashionable areas and are frequented by high-income earners who can afford to pay high prices for goods. Conspicuous consumption allows the high price to be charged. Because there is a limit on the number of shops in this area (that is, a small supply), there is a high demand for them, thus driving up their rent. Thus, it is the high prices that can be charged for goods in these shops that drive up the rents. € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥

Land 12 € £ $ Understanding Economics, © Richard Delaney, 2008, Edco ¥