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Why is the supply of land considered to be perfectly inelastic

The supply of factors also exercises an important influence on the prices of factors. But following Marshall and Hicks, in the modern explanation of pricing of factors role of both the demand and supply of factors is given equal importance. The nature of demand for factors and the factors determining it and its price elasticity of demand. In what follows we shall spell out the nature of supply of various factors.

Repeating The Case For Inelastic Land Supply

It is worth mentioning at the very outset that, unlike the demand for factors, the nature and behaviour of supply of various factors is not uniform. It may be noted that the supply represents the different quantities of that factor which are offered for sale at various alternative prices.

Perfectly inelastic

From the viewpoint of the nature of supply, factors may be divided into two classes original and produced factors. Produced factors are the intermediate physical inputs such as capital equipment i. So far as the supply curve of these produced factors is concerned it is governed by the same laws of production which apply to the production and supply of goods produced by various industries.

Therefore, the supply curves of produced inputs factors depend upon the changes in marginal cost of production. So long as marginal cost rises as output is expanded in industries such as machine-making steel, fertilizers, marginal cost curve slopes upward and therefore the supply curve of these material inputs slopes upward.

However, if the industries producing certain intermediate physical inputs experience decreasing costs as their outputs expands, their supply curve will be sloping downward. Land and labour are called original or primary factors of production as they are not produced in the industries. Land is a free gift from nature and therefore its quantity is fixed by nature.

  • Elastic Supply Graph 2;
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  • But the supply of land to a single use or to a particular industry is not perfectly inelastic;
  • For instance, when the price increases, suppliers can increase the use of their available resources and they can hire more labor over the short term;
  • So long as marginal cost rises as output is expanded in industries such as machine-making steel, fertilizers, marginal cost curve slopes upward and therefore the supply curve of these material inputs slopes upward.

More land cannot be produced in response to greater demand for it. Whatever the rent, high or low, for the use of land, its supply to the economy as a whole remains unchanged.

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In other words, the supply of land to the entire economy does not depend on the price i. Hence, from the standpoint of the whole economy, the supply of land which includes natural resources is perfectly inelastic.

Since supply of land is a free gift from nature and not a produced factor, cost of production has no relevance for its supply.

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  • The supply of land for a particular crop or industry can be better explained with the help of the concept of transfer or alternative earnings.

For the society as a whole, land has got no cost of production, since society did not produce it; it got it free from nature. But the supply of land to a single use or to a particular industry is not perfectly inelastic.

  • On the other hand, even if the price is very high, the farmer has no way of supplying more watermelons right away;
  • But following Marshall and Hicks, in the modern explanation of pricing of factors role of both the demand and supply of factors is given equal importance.

The supply of land to a particular use or industry can be increased by shifting of land from other uses or industries. By offering attractive rents, the supply of land for a particular use can be increased by taking it away from other competitive uses. The supply of land for a particular crop or industry can be better explained with the help of the concept of transfer or alternative earnings. The transfer earnings of a factor may be defined as the earnings in the next best alternative use.

Thus the transfer earnings of a piece of land under wheat is the amount of money earned by it if it is put to the cultivation of cotton, assuming that, after wheat, growing of cotton is the next best use of that piece of land. If that piece of land earns Rs. Now, a piece of land will be supplied to a particular use if at least its transfer earnings are paid to it. In our present example, if the earnings of the prices of land fall below Rs.

Therefore, the supply curve of land to a particular use, crop or industry is elastic and slopes upward from left to right.

This is shown in Figure 32. We now turn to the supply of capital which is a produced factor and occupies these days a paramount place in the productive process. Here a distinction must be made between real or physical capital i. Capital goods are produced factors as compared to the primary factors like land and labour which are not produced.

  1. However, once the durable capital goods have been produced, their supply is independent of their cost. Information is shared about your use of this site with Google.
  2. However, as prices continue to drop, then eventually suppliers will sell their factors of production, or suppliers will leave the industry to find better opportunities elsewhere.
  3. Homeowners earn imputed rents , making them similar to income-earning property owners. You can control and delete any information collected by Google on this page, including any information obtained from users of this website.

Capital goods are produced by firms on the same basis as consumer goods. The nature of supply of consumer goods has been discussed in part IV. The supply of capital goods is determined by the same factors as those which determine the supply of consumer goods.

Land (economics)

Since capital goods are reproducible, the cost of production exercises a significant influence over their supply. If the industry producing a capital good is subject to increasing costs, the supply curve of that capital goods will be upward sloping indicating that more of it will be supplied at a higher price.

And if the industry producing a certain capital good is working under constant cost conditions, the more of that capital goods will be supplied at the same price and therefore its supply curve will be a horizontal straight line.

However, once the durable capital goods have been produced, their supply is independent of their cost. But, over a period of time, cost is, no doubt, a determining factor of their supply. As regards financial capital, the nature of its supply is very complex.

The supply of financial capital depends upon the money supply in the economy, the savings of the people, their willingness to lend it or buy shares and bonds i. An increase in the rate of interest has an important effect on the willingness of the people to save more and to accumulate more financial capital.

Moreover, increase in the rate of interest exercises a strong effect in inducing the people to part with the money capital and lend it to businessmen or buy shares and bonds of companies. In other words, the rise in the rate of interest induces people to surrender liquidity, and lend it to others.

The supply of labour can be viewed as supply of labour working hours of an individual, the supply of labour for an industry or occupation, and supply of labour for the economy as a whole. We begin with the analysis of supply of labour working hours by an individual. Alternative or opportunity cost of working for a period is the sacrifice of leisure by the individual for that time period.

It should be noted that leisure is a desirable object which provides satisfaction to the individuals. On the other hand, work provides income to the individual with whom he can buy goods and services to satisfy his wants. How much leisure an individual will be willing to sacrifice, that is, how many hours of work he will do depends on the wage rate.