Question

As a business consultant, how would you explain to your client what determines the economic rent for land?

Answer 1

Economic rent implies the revenue that can be earned from land or other natural resources whose supply is fixed. It is over and above opportunity cost which is necessary to keep a resource in its current use. The economic rent for land can be determined with the help of its demand, it is the only active determinant because supply is fixed. Fixed supply implies that supply curve is perfectly inelastic. Increased demand cannot increase supply of land because it is a natural product that will always remain available in fixed quantity. Demand of land is determined by price of the product produced on land, land's productivity or the purpose for which it can be used, location of land, etc. So, economic rent will be determined by the intersection of demand curve & inelastic supply curve of land. This is shown in the figure drawn below which shows the demand curve as well as inelastic supply curve of land. When demand curve for land was , the economic rent was . As the demand curve shifts towards right from , the economic rent rises from . We can see that the supply of land remains fixed at , the change in economic rent was due to change in demand for land. So, the active determinant of economic rent for land is demand for land.