Introduction to Land Rent
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.
Fig. 7.1 - Fertility and Land Rent
MC
$
MC
MC
AC
Rent
Rent
AC
AC
Corn Mkt.
High Fert.
Med. Fert.
Why?
Low Fert.
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??
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:
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
Land Rent and Accessibility
R = PQ - C - tQu
• What happens to rents as distance
increases?
R/u = -tQ
A> They fall. Why?
An example -- Worksheet for Figure 7.3
Fill in some numbers.
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
Flexible Production
A farmer with fixed production methods
faces a linear rent curve.
Pick a point A, with a certain technology.
Rent
If we move 1 mile further away, we’ll
remain on the red rent curve.
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 we’ll be bid UP.
Distance
Flexible Production
Do the same going the other way.
Rent
We get a convex land rent function.
0
Distance
u
Competing for Land
O'Sullivan 7-8
300
200
Rent in $
100
Rent1
0
Rent2
0
1
2
3
4
-100
-200
-300
Miles
5
6
7
Mkt
• 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.