Fixed Supply and Economic Rent

Some goods or productive factors are completely fixed in amount, regardless of price. There- is only one Mona Lisa by Nature’s original endowment of land can be taken as fixed in amount .

Raising the price offered for land cannot create an additional corner at 57th Street and Fifth Avenue in New York.City. Raising the pay of star athletes is tin likely to change their effort; When the quantity plied is constant at every price, the payment for the use of such a factor of production is called rent or economic rent.

When supply is independent of price, the ply curve is vertical in the relevant region. Land will continue to contribute to production no matter what its price. Figure 8-9 shows the case of land, for which a higher price cannot coax out any increase in output.

An increase in the demand for a fixed factor will affect only the price. Quantity supplied is unchanged. And the rise In price exactly equals the ward shift in demand.

When a tax is placed upon the fixed commodity. the tax is completely paid by (or “shifted” back to) the supplier (say. the landowner), The supplier absorbs the entire tax out of economic rent. The consumer buys exactly as much of the good or service as before and at no higher price.

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