Question

Assume that the supply of land is perfectly inelastic as shown in the diagram. The demand for land has shifted from D, to D2. What is the total value for economic rent after the change in demand? D2 Quantity per week

Answer 1

ans =option b=P2 X Q*

Rent was regarded as a compensation made to a factor of production whose overall supply was perfectly inelastic . If the total supply of a factor is perfectly inelastic, no price is required to be paid to stimulate it to become available for production. Land is the chief instance of the factor of production whose overall supply is fixed to the entire economy . This is so as it is nature’s   free gift & is non-reproducible. Hence the supply of land can’t be augmented whilst the demand for it & thus the price for its utilization increases.

On the other hand, even if the price of its utilization falls to 0, the overall supply of land will stay unimpacted. Land is there anyhow & doesn’t need to be given any price to prevail & be available for production. This implies that, the transfer earnings of land for the whole economy are 0. Hence, to the classical economists, land’s earnings are a functionless surplus, i.e., whatever price land happens to receive isn’t needed to be given for it to keep it in existence.

Thus, they considered the whole price for land as economic rent described as the sur­plus payment in addition to what is needed to be disbursed to make it available to society.

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