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Principles of Economics- Mankiw (5th) 399

Principles of Economics- Mankiw (5th) 399 - CHAPTER 18 T H...

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CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 411 distinguish between two prices: the purchase price and the rental price. The pur- chase price of land or capital is the price a person pays to own that factor of pro- duction indefinitely. The rental price is the price a person pays to use that factor for a limited period of time. It is important to keep this distinction in mind because, as we will see, these prices are determined by somewhat different economic forces. Having defined these terms, we can now apply the theory of factor demand we developed for the labor market to the markets for land and capital. The wage is, after all, simply the rental price of labor. Therefore, much of what we have learned about wage determination applies also to the rental prices of land and cap- ital. As Figure 18-7 illustrates, the rental price of land, shown in panel (a), and the rental price of capital, shown in panel (b), are determined by supply and demand.
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