Question

Describe the process by which the market for capital and the market for land reach equilibrium. As part of your description, elaborate on the role of the stock of the resource versus the flow of services from the resource.

Answer 1

What is capital? Capital is one of the factors of production. Capital is an asset whoch helps to generate production. For example loans taken for purchasing machine. So machine is capital, raw material which is kept by the producer in the form of inventory is capital, building factory is capital. Therefore capital is a factor of production so it must be remenurirated. Rate of interest is the price of capital of capital receives interest. But how does market of capital reaches to equilibrium?

Equlibrium is a postion of rest. It is that point where both demand and supply forces are equal and balanced. Therefore the equlibrium of capital is that point where demand for capital by the producers is equal to the supply of capital which depends on rate of intereset and vice versa. In this way eqilibrium of capital market depends on demand and supply of capital which is determined through rate of interest which is the price of capital

.Lets assume that demand for capital is more than the supply of capital. In this situation buyers are more than the supplier( in this case banks whio provides capital) As buyers are compiting with each other they will force to increase the price ( interest rate) as interset rate goes up. buyers willingness to get loans will go down .. Law of supply says that as rate goes up supplier will ready to give more loans but buyers willingess goes down quantity demanded falls as a result rate of interest goes down In this way both of them will come to that piont whre both Qd and QS are equal. It means that competition among buyers and sellers will determine the price and equalbrium of capital market will be achieved.

Similarly market of land price is also determined demand and supply forces . Rent is the price for land. Land owners are more motivated when the charges of rent are high. Purchasers of the land are more motivated when rent is less. Therefore again the competition among buyers and sellers will determine the equlibrium of land market. If buyers are more forcefull the prices of land that is rent will go up. If suppliers are cometiing than prices of land will go down and rent will decrease. In this way the equlibrium of land market will be determined.

The role of stock of resourecs is very important in this regard. If resoureces are easily available and people are exploiting these resouces with lesser cost their use will be more. and vice versa.

Similarly flow of services is contineous than atomatically effecincy will increase and productiy will go up and vice vesrsa