MODULE 34 (70) The Markets for Land and Capital

2. MODULE 34 (70)The Markets for Land and Capital

3. How to determine supply and demand in the markets for land and capital • How to find equilibrium in the land and capital markets • How the demand for factors leads to the marginal productivity theory of income distribution

4. Land and Capital • If we maintain the assumption that the markets for goods and services are perfectly competitive, the result that was derived for the labor market also applies to other factors of production. • To maximize profit, the land owner will rent (or demand) more land up until the value of the marginal product of an acre of land is equal to the rental rate per acre. • In other words, conduct marginal analysis.

5. Rental rate • What is the rental rate of capital or land you already own? • Opportunity cost • What is the explicit cost of land you don’t own? • Rental rate

6. Equilibria in the Land and Capital Markets (b) The Market for Capital (a) The Market for Land Rental rate Rental rate S Land R* S Land Capital R* Capital D D Capital Land Q* Q* Quantity Quantity Capital Land **Land supply relatively inelastic **Capital supply more elastic (e.g., loan)

7. The Marginal Productivity Theory • In perfectly competitive case, factors of production will be employed up to the point at which the value of the marginal product is equal to their price. • The marginal productivity theory of income distribution says that each factor is paid the value of the output generated by the last unit of that factor employed in the factor market as a whole.

8. Hamill Manufacturing of Pennsylvania makes precision components for military helicopters and nuclear submarines. Their highly skilled senior machinists are well paid compared to other workers in manufacturing, earning nearly $70,000 in 2006, excluding benefits. Like most skilled machinists in the United States, Hamill’s machinists are very productive: according to the National Mechanists Association, in 2006 each skilled American machinist generated approximately $120,000 in yearly revenue. But there is a $50,000 difference between the salary paid to Hamill machinists and the revenue they generate.  • Does this mean that the marginal productivity theory of income distribution doesn’t hold? Doesn’t the theory imply that machinists should be paid $120,000, the average revenue that each one generates? 

9. Check your understanding • A firm will continue to employ more land until its value of the marginal product of land isa. zero.b. maximized.c. equal to the rental rate.d. equal to the wage rate.e. equal to the value of the marginal product of labor and capital. • According to the marginal productivity theory of income distribution,a. each unit of a factor will be paid the value of its marginal product.b. as more of a factor is used, its marginal productivity increases.c. factors that receive higher payments are less productive.d. capital should receive the highest portion of factor income.e. each factor is paid the equilibrium value of its marginal product.

10. Profit-maximizing price-taking producers will employ afactor up to the point at which its price is equal to itsvalue of the marginal product for land and capital. • The marginal productivity theory of incomedistributionsays that each factor is paid thevalue of the marginal product of the last unit of that factoremployed in the factor market as a whole.