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.that may be 50 or more times as great as that receivedThat same reason explains why rents are high for by a typical worker?stores in trendy locations.Rents are bid up as prospec- One reason is a great demand for their services.tive tenants compete with each other for the desirable Lots of people are willing to pay high prices to hear thePrice of Land (R) 95469_17_Ch17-p449-482.qxd 14/1/07 2:23 PM Page 468468 MODULE 4 Input Markets, Income, and PovertyDave Matthews Band; a famous heart surgeon may professors additional training and background typi-have all the patients she could possibly operate on, even cally allow them to earn several thousand dollars aat a price of thousands of dollars per operation.The year more than they could earn in the next mostsecond reason is that the resources that command remunerative employment, say, high school teaching.such a large amount of compensation are in highly If college teaching was not available, they mightlimited supply.There is only one Dave Matthews supply their services to high schools for perhapsBand; no one can quite precisely match the qualities $25,000 less.that make their band so successful.If you are sufferingfrom a severe heart disease that is potentially curableby surgery, you would like to go to best surgeon.By SUPPLY AND DEMAND IN THE CAPITAL MARKETdefinition, there can be only one best surgeon orCapital (buildings, machines, and equipment) can beonly a few who can be one of the top heart surgeons leased or rented for some stipulated period ofin the country. The limit on supply is the largesttime.For example, we might want to analyze thesingle factor in explaining the high salaries of certainmarket for a certain type of machine that can be usedpeople.If we could train exact duplicates of rock starsin making chocolate.Following the law of demand,or famed heart surgeons, the incomes of those rockthe lower the rental price of a chocolate-makingstars and surgeons would fall, as an increase in supplymachine (which would lower the cost of making choco-would lead to a lower equilibrium wage.late), the greater the quantity of chocolate machinesPeople who receive their income because of a dis-demanded.Following the law of supply, the greatertinct, unique skill or talent are collecting economicthe rental price of the machine, the more willingrent compensation for a resource whose supply isowners of chocolate machines are to supply them toperfectly inelastic over the relevant range of prices.Inentrepreneurs.other words, the amount of, say, labor services pro-Rather than renting a chocolate machine, a choco-vided will be the same if the annual compensation islate maker may borrow funds and buy its own$50,000 or $250,000.Or if the famed heart surgeonmachine.In this case,could only get $5,000 per operation instead ofthe manufacturer is bor-$20,000, she would still operate.Only at a low pay-interestrowing funds for thement, say $500, might the surgeon decide that thethe cost of borrowed fundspurpose of acquiringcompensation was inadequate.At high levels of com-capital.The cost of thepensation, increases in compensation do not increaseborrowed funds is usu-the amount of services provided by such people.Inally called interest.At lower interest rates, the cost ofaddition, it does not bring new suppliers unless theyfinancing the purchase of the chocolate machine ishave precisely the qualities or skills necessary to do thejob.The inelasticity of supply (e.g., Julia Roberts, TigerWoods, or Madonna) gives the owners of the resourceThe Supply and DemandSECTI ON 17.5in limited supply some monopoly-like powers thatE XHI BI T 2for Capital Goodsallow them to earn extraordinary incomes.Another way of looking at economic rent is thatSit represents the payment that the resource ownerreceives beyond what he or she would receive usingthe resource in its next most attractive use.The heartsurgeon who will do the surgery if the price is $5,000Por $20,000 might, at a fee level of $500, decide thatalternative employment (e.g., general practice) is morerewarding
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