Download Module 70 - The Markets for Land and Capital

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
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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
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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
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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
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