If the supply of a productive resource is perfectly elastic, it earns no economic rent…I don’t really understand the logic here? Isn’t rent what we get paid over what we ecpect to get paid? How is the supply of the input related?
thnx
For a productive resource to be perfectly inelastic, it is necessary that the market price of it does not affect the quantity supplied thereof. The best example is land because the land available for production does not change when its price increases or decreases, its quantity in the world is fixed and no one can change that. Hence, any amount of money paid for land is enterely considered economic rent (or approximated).
For perfectly elastic productive resources, the opposite happens. A perfectly elastic supply curve is flat. This means that quantity supplied is infinitely sensible to changes on the price of the good. An example I can give is aerospace ships production. If you don’t pay the 999,999,999,999 dollars you need to set the project, you just get no ships. Production is very sensible to market price. Hence, due that there is only 1 correct price, the good does not get economic rent.
A way to see this is by plotting the curves. At a normal supply curve (positvely sloped) scenario. the area behind the price and above the supply curve is called producer surplus or also economic rent. If you graph a flat supply curve the area does not longer exists, hence zero economic rent.
Hope this help. Any question please ask!
If it’s perfectly elastic, then the price is fixed: think about the supply curve in perfect competition.
Zero economic rent.