NOTE_Lecture_20_-_land_capital_entrepren

NOTE_Lecture_20_-_land_capital_entrepren - Land, Capital...

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1 Land, Capital & Entrepreneurs Objectives What is land? – Are prices of goods high because rents are high, or are rents high because prices of goods are high? What is capital? – How is the interest rate determined? The loanable funds market – Present value of future income How are profits determined? – Theories of profit Rent What Is land? Land is a resource or a factor of production. It includes the ground as well as the natural resources within the ground, but does NOT include the buildings on the land The owner of land is paid rent for allowing its use in the production process; rent is therefore the price of using the land The amount of rent paid for a piece of land is based on the supply of and the demand for land
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2 The demand for land A plot of land may have alternative uses; the demand for the land will depend on what it is being used for and the revenue that can be generated from it (or the value of the land to the household) If it is used at all, it will be used by the highest bidder – the one willing to pay the most for it The basic way one piece of land differs from another is location An acre of land in the middle of a desert is worth a lot less than an acre of land in a metropolitan area Retail square footage differs between a store in Valley Fair mall and one in a Gilroy strip mall How Is the demand for land derived? The demand for land, like the demand for labor (and capital), is derived from a firm‟s MRP curve for land The demand curve for land slopes downward to the right because its marginal physical product declines with output (due to law of diminishing returns) Graph of demand for land # of acres Rent ($) MRP of land = Demand for land
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3 The supply of land In the short run, the supply of land is fixed At any given location, there is a fixed amount of land We represent the supply of land as a vertical line # of acres Rent ($) Supply of land Determination of rent # of acres Rent ($) MRP of land = Demand for land Supply of land Rent, or the price of land, is determined by the supply and demand for the land. Rent e Increase in demand for land Since the supply of land is perfectly inelastic, an increase in demand is reflected entirely in an increase in price of the land, or rent (and not an increase in the quantity of land). # of acres Rent ($) D1 Supply of land Rent 1 D2 Rent 2
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4 Economic rent Economic rent refers to payment in excess of what a producer (or landlord) would be willing to accept Thus, rent paid to landlords (exclusive of any payment for buildings and property improvement ) is, by definition, economic rent Are prices high because rents are high? High rents don‟t cause high prices Rather, rents are high because the demand for the final product(s) – and consequently the derived demand and MRP of the land – is high For ex., desirable locations attract many prosperous renters, who bid up rents because they believe they will get a lot of business Capital and interest What is capital? Capital consists of manmade goods that are used to
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NOTE_Lecture_20_-_land_capital_entrepren - Land, Capital...

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