Definition of Rent: Rent is a payment in excess of Transfer Earning.

What is Transfer earning?According to Benham, “the amount of money which

prevents a factor of production from getting itself transferred to another occupation.

ASSUMPTIONSSupply of land is perfectly inelastic.Single crop – ‘corn’.Perfect competition in demand and supply of

the land.Land is homogeneous.Transfer earnings of land are zero. It means

either the land is used to produce corn or kept fallow.

Determination of RentRent is determined

by the demand and supply of land.

D’

D’

D

D

O S X

SY

Rent

Figure - 1

E’

E

Area of Land

R’R

DEMAND FOR LAND The demand for land is a derived demand. Now, what is derived demand? – It is derived

from the demand of corn.the demand for land also depends upon the

Marginal Productivity of land (MPL). The MPL is diminishes as more land is used. Thus the demand curves are downward sloping.

SUPPLY OF LANDThe supply of land is perfectly inelastic at

macro level, although the supply of land can increase at individual level.

The SS supply curve of land is a vertical straight line.

EXPLANATION OF FIGURE - 1The demand curve – DD and supply curve –

SS intersect at E, OR is rent of the land, because the transfer earning is zero. Suppose that population increases, then the demand for corn will also rise to D’D’. Since the supply of land in perfectly inelastic, therefore the SS will unchanged. Thus the new equilibrium will be E’. Now the rent is OR’.