Introduction to Land Rent

1
Introduction to Land Rent
2
Land Rent and Fertility

• Fixed prices of inputs and outputs.
• Zero economic profit.
• Three types of land
• high fertility
• medium fertility
• low fertility
• Land to highest bidder.
• Zero transport costs.

3
Fig. 7.1 - Fertility and Land Rent
MC
MC

MC
AC
Rent
Rent
AC
AC
Corn Mkt.
High Fert.
Med. Fert.
Low Fert.
Why?
4
Fig. 7.2 - Fertility and Land Rent
MC
MC

MC
AC
Rent
Rent
Rent
Rent
Rent
AC
AC
Corn Mkt.
High Fert.
Med. Fert.
Low Fert.
Increased Fertility.Why do rents change??
5
Land Rent and Accessibility

• Again, fixed prices.
• Central mktplace, costs t/mile to get there.
  Distance to mktplace u.
• Competitive markets
• All land is equally fertile, so production costs
  are the same everywhere.
• A little algebra

6
Land Rent and Accessibility

• ? PQ - C - tQu - R
• So, if we have perfect competition, what happens
  to profits ??
• They go to zero!
• So
• 0 PQ - C - tQu - R, or
• R PQ - C - tQu

7
Land Rent and Accessibility

• R PQ - C - tQu
• What happens to rents as distance increases?
• ?R/?u -tQ
• Agt They fall. Why?
• An example -- Worksheet for Figure 7.3
• Fill in some numbers.

8
Land Rent and Accessibility

• If we want to look at Rent/acre, we now have
• RT PQ - C - tQu (T of acres)
• What happens to rent/acre as distance increases?
• R (PQ - C - tQu)/T
• ?R/?u -tQ/T

9
Flexible Production
A farmer with fixed production methods faces a
linear rent curve.
Pick a point A, with a certain technology.
If we move 1 mile further away, well remain on
the red rent curve.
Rent
Since land is cheaper, here, if we can substitute
it for labor or capital, we can make higher
profits. Others can do the same, so the rent
well be bid UP.
Distance
10
Flexible Production
Do the same going the other way.
Rent
We get a convex land rent function.
0
Distance
11
Competing for Land

• Producers of Type 1 will have the highest bids
  for land, up to two miles away.
• Producers of Type 2 will have the highest bids
  for the land further away.