AP Economics Mr. Bernstein Module 70: The Markets for Land and Capital December 2015

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 VMP Land = R Land or VMP Capital = R Capital 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