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AP Economics Mr. Bernstein Module 70: The Markets for Land and Capital December 2016 AP Economics Mr. Bernstein Demand in the Market for Land and Capital • Price for Land or Capital is the Rental Rate (R) • Firms hire Land or Capital up to the point VMPLand = RLand or VMPCapital = RCapital • Can be explicit rent • Ie pay to lease a machine • Or can be implicit rent • ie own the machine and forego the opportunity cost of renting it to another firm 2 AP Economics Mr. Bernstein Supply in the Market for Land and Capital • Supply of Land is upward-sloping and can be nearly vertical (inelastic) due to finite amount of usable land • Supply of Capital is upward-sloping but very elastic – capital manufacturers are responsive to price changes 3 AP Economics Mr. Bernstein Equilibrium in the Market for Land and Capital • Supply and Demand very similar to Product mkts • Adjustments occur as exit/entry allows 4 AP Economics Mr. Bernstein Marginal Productivity Theory • In equilibrium, the last unit employed is paid a rental rate or wage equal to VMP. • Labor receives about 70% of total factor income 5