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Chapter 17: Problem 1

In equilibrium, what determines the price of capital? What determines the price of natural resources? What is an economic rent?

Short Answer

Expert verified
The price of capital and natural resources in equilibrium is typically determined by the forces of supply and demand, with other factors such as government policies, location, and quality playing a part for natural resources. An economic rent is the extra payment made to any factor of production due to scarcity; essentially, it's an above-market rate earned because the factor is in shorter supply than demand.

Step by step solution

01

Discussing the price of capital

In an equilibrium state, the price of capital is determined by the forces of supply and demand. If demand for capital (such as machinery, buildings, etc.) is high and supply is low, the price of capital will increase. Conversely, if supply is high and demand is low, the price will decrease.
02

Discussing the price of natural resources

Similar to capital, the price of natural resources (such as oil, minerals, timber etc.) is generally determined by supply and demand. However, other factors also come into play. Government policies can incentivize or discourage extraction of certain resources, affecting their availability and price. Moreover, the quality and location of resources can also affect their price.
03

Explaining the economic rent

Economic rent is the excess payment made to any factor of production (like land, labor, or capital) due to scarcity. Essentially, it's the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use. In simple terms, an economic rent is more or less a 'bonus' that a factor earns over its minimum required payment.

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Most popular questions from this chapter

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