Definition of Rent: Rent is a payment in excess of Transfer Earning. What is Transfer earning? According to Benham, “the amount of money which prevents a factor of production from getting itself transferred to another occupation.

ASSUMPTIONS Supply of land is perfectly inelastic. Single crop – ‘corn’. Perfect competition in demand and supply of the land. Land is homogeneous. Transfer earnings of land are zero. It means either the land is used to produce corn or kept fallow.

Determination of Rent Rent is determined by the demand and supply of land. D’ D D O S X S Y Rent Figure - 1 E’ E Area of Land R’RR’R

DEMAND FOR LAND The demand for land is a derived demand. Now, what is derived demand? – It is derived from the demand of corn. the demand for land also depends upon the Marginal Productivity of land (MPL). The MPL is diminishes as more land is used. Thus the demand curves are downward sloping.

SUPPLY OF LAND The supply of land is perfectly inelastic at macro level, although the supply of land can increase at individual level. The SS supply curve of land is a vertical straight line.

EXPLANATION OF FIGURE - 1 The demand curve – DD and supply curve – SS intersect at E, OR is rent of the land, because the transfer earning is zero. Suppose that population increases, then the demand for corn will also rise to D’D’. Since the supply of land in perfectly inelastic, therefore the SS will unchanged. Thus the new equilibrium will be E’. Now the rent is OR’.