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AP Economics

AP Economics. Mr. Bernstein Module 70: The Markets for Land and Capital January 6, 2014. AP Economics Mr. Bernstein. Demand in the Market for Land and Capital Price for Land or Capital is the Rental Rate (R)

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AP Economics

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  1. AP Economics Mr. Bernstein Module 70: The Markets for Land and Capital January 6, 2014

  2. AP EconomicsMr. 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

  3. AP EconomicsMr. Bernstein Supply in the Market for Land and Capital • Supply of Land is upward-sloping and 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

  4. AP EconomicsMr. Bernstein Equilibrium in the Market for Land and Capital • Supply and Demand very similar to Product mkts • Adjustments occur as exit/entry allows

  5. AP EconomicsMr. 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 • Therefore, VMPLabor > VMPLand or Capital

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