AGEC 603. Setup. Three Concepts of Rent. Rents. Inputs. Surplus of value. Rent

Transcription

1 AGEC 603 Inputs Two inputs land / capital No fixed costs Land fixed Surplus of value net returns Rent Setup Three Concepts of Rent Contract rent actual payments made for the use of the property of others Land Rent the theoretical earnings of land for its use in production Economic rent surplus of income above the minimum supply price necessary to bring a factor into production 1

2 PRICE Land = Net Returns Gray area = TR = P * Q Green area = TR - TC Red area TC = x Q Land Green box = net returns = rents = Residual economic surplus Produce at MR = MR Intensive margin 5 Area of insufficient input use Area of too much input use LAND RENT RESULTS Rent is excess of revenue over costs Rent is determined by output price Rent is not output price determining 2

3 Price Price Price What Gives Rise to Land grades - Ricardo Location von Thünen Use capacity Land Grades Three operators Face the same output price Homogenous product Different grades of land fertility differences Grades differ in their costs of producing Due to Fertility Intensive margins Extensive margin MR MR MR 3

4 Price Price Additional Rent Details Four grades of land price = $2 Notice only grade A produces D Extensive margin 2 Price increases to $2.5 Grade A and B produce only A has rents D Extensive margin Aspects of Surplus of $0.50 / output unit increase in costs Rent is not needed to ensure continued production for grade A Surplus exists and will not dissipate goes to the owners Land rent arises because of fertility differences 4

5 Price Price Price increase to $3.33 Grade A, B and C produce A and B have rents D Extensive margin Price increase to $4 All grades produce A, B, and C have rents Extensive margin D Aspects of Rent Surpluses (Rent) varies by grade Grade A = $2.00 Grade B = $1.50 Grade C = $0.77 Grade D = $0.00 Careful not quite As price increased so did output Increase output increases Rent is something less These are prices changes necessary to bring the grade to extensive margin. More fertile the land the larger the rent Extensive margin shifts outward as price increases Surplus exist and will not dissipate 5

6 Price Price Price DAVID RICARDO SAYS: Corn Is Not High Because a Rent Is Paid, but a Rent Is Paid Because Corn Is High Location Johann Heinrich von Thünen rent and a central market Homogenous product On market sell at market price = P Three locations Must pay transportation cost to the market Price received = market price transportation costs Location Impact on All grades produce A, B, and C have rents P P Trans 250 P Trans 500 At the market 250 miles 500 miles 6

7 Aspects of Further from the market the smaller the rents arise because of location Lower rents farther the distance Lower net price received Smaller output Location Continuum Assumptions Further from the market the smaller the rents Product value $150 / at the market Transportation costs = $0.30 / ton mile Cost to produce = $138 / ton Example rents at three locations of production At the market = = $12 / ton 20 miles = (20 *.3) = $6 / ton 40 miles = (40 *.3) = $0.00 Example - Graphically $ Costs $150 $ $0 $ $12 $144 $6 $138 $12 $ Miles $ Miles 7

8 Land Rent Triangle Total costs and value of the product $ Market Price Land Stop No Rent Margin $ $ Transportation Costs Other Costs No Rent Margin Distance Miles Production + transportation costs Distance Miles Land rents can reflect Amenities Convenience of access Savings, time distance Use capacity Measures the cumulative impact of various factors that affect land quality Fertility, location, accessibility, amenities, convenience, etc. Rent Total costs $ M Land T $ U $ S Triangle KLR = WRS Triangle KTM = UCS L K R Costs W S W R No Rent Margin 0 B C U 0 B C T 8

9 Other Views of Rent as a return on investment Real estate a type of capital Land rents are the return to the market value of land resources Rent as an unearned increment Unearned return to landowners Unearned increments capitalized into selling price No real conflict between the three views Significance of Land Effects on rental arrangements Relation to land values Resource development decisions Effects on land use allocations Rental Arrangements Idea situation contract rates approximate land rents Why deviates Inadequate information Economic conditions Short run demand and supply conditions Recessions and booms Bargaining Power of landlords and tenants Tenants opportunities Share tenants 9

10 Price Share Tenants - details Assume share as 10% to owner 90% tenant $ MFC MVP 90% MVP R S Input Level Relation to Land Values Theoretical real estate current market value = PV (expected future rents) Capitalization value cap value = land rent interest rate Review cap value / cap rate / discounting Question Which land plot would you expect to have the largest market value if the following is expected to continue into the long run? Why? P 10

11 Price Question A largest land rent something such as fertility, location, use capacity is causing parcel A to have the largest rent. P Resource Development Decisions Expectations of future flows of land rents are an investment guide Invest only if future flows of land rents are satisfactory Land Use Allocations Single land use to this point Reality number of alternatives Recall can get a land rent triangle for each different enterprises Assume three types of land use 11

12 Three Rent Triangles Land E F G Commercial c-r Residential r-a Agriculture O P R T Three Rent Triangles Land E F Commercial c-r Intensive Margins G Residential r-a Agriculture O P R T Three Rent Triangles Land E F Commercial c-r Extensive Margins = no rent margins G Residential r-a Agriculture O P R T 12

13 Three Rent Triangles Land E F G Rent bid gradient = envelope curve Commercial c-r Residential r-a Agriculture O P R T Three Rent Triangles Land E F G Rent bid gradient = envelope curve Commercial c-r Residential r-a Agriculture O P R T Land E F G Three Rent Triangles Margins of transference Commercial c-r Residential r-a Agriculture O P P R R T Zones of transference 13

14 Three Rent Triangles Land E Urban growth commercial and residential shifts to dotted lines F cr cr G ra ra O J K P P R R T 14