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Introduction to Land Rent

Introduction to Land Rent. Land Rent and Fertility. Fixed prices of inputs and outputs. Zero economic profit. Three types of land high fertility medium fertility low fertility Land to highest bidder. Zero transport costs. Fig. 7.1 - Fertility and Land Rent. MC. MC. $. MC. AC. Rent.

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Introduction to Land Rent

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  1. Introduction to Land Rent

  2. Land Rent and Fertility • Fixed prices of inputs and outputs. • Zero economic profit. • Three types of land • high fertility • medium fertility • low fertility • Land to highest bidder. • Zero transport costs.

  3. Fig. 7.1 - Fertility and Land Rent MC MC $ MC AC Rent Rent AC AC Corn Mkt. High Fert. Med. Fert. Low Fert. Why?

  4. Fig. 7.2 - Fertility and Land Rent MC MC $ MC AC Rent Rent* Rent* Rent Rent* AC AC Corn Mkt. High Fert. Med. Fert. Low Fert. Increased Fertility.Why do rents change??

  5. Land Rent and Accessibility • Again, fixed prices. • Central mktplace, costs t/mile to get there. Distance to mktplace = u. • Competitive markets • All land is equally fertile, so production costs are the same everywhere. • A little algebra:

  6. Land Rent and Accessibility  = PQ - C - tQu - R So, if we have perfect competition, what happens to profits? They go to zero! So: 0 = PQ - C - tQu - R, or: R = PQ - C - tQu

  7. Land Rent and Accessibility R = PQ - C - tQu • What happens to rents as distance increases? R/u = -tQ A> They fall. Why? An example -- Worksheet for Figure 7.3 Fill in some numbers.

  8. Land Rent and Accessibility If we want to look at Rent/acre, we now have: RT = PQ - C - tQu (T = # of acres) • What happens to rent/acre as distance increases? R = (PQ - C - tQu)/T R/u = -tQ/T

  9. Flexible Production A farmer with fixed production methods faces a linear rent curve. Pick a point A, with a certain technology. If we move 1 mile further away, we’ll remain on the red rent curve. Rent Since land is cheaper, here, if we can substitute it for labor or capital, we can make higher profits. Others can do the same, so the rent we’ll be bid UP. Distance

  10. Flexible Production Do the same going the other way. Rent We get a convex land rent function. 0 Distance

  11. Competing for Land • Producers of Type 1 will have the highest bids for land, up to two miles away. • Producers of Type 2 will have the highest bids for the land further away.

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