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Law of Rent

The diagram represents a model of an economy. Each bushel of wheat represents a unit of production occurring on the land underneath it. The "best" (most productive) land is seen at the left hand side, where the level of production is highest. Land that is not in use, and is therefore available for production, is depicted by trees, along with the potential production that could occur on that land if it were put to use. Whenever people arrive in or are born into the economy, they begin to work on a plot of land. Naturally, they will want to work on the best land that they can get, because this is what guarantees them the greatest production. They can choose either to take the most productive free (unused) land that is still available, or to pay rent so that they can use better land that is already occupied. If they choose to rent land, then the person they are renting from will give up their land and move to the free land. However, that person will not be willing to do so unless they are fully compensated for the advantages this requires them to give up - i.e., the difference between the production on their existing land and that on the free land. Therefore, the rent of a piece of land will be equal to the difference between what can be earned by working on that piece of land relative to the same amount of work on the margin of production.
  • The margin of production is the least productive land in use, and the level of production occurring on that land is called the marginal product.
  • Rent is the productive advantage gained in using a particular piece of land relative to the margin of production. People are willing to pay this difference because their next best alternative to renting is to use the free land at the margin of production.
Since rent takes up all of the advantage relative to the margin of production, it can be seen that wages everywhere will tend to equal those at the margin. Hence, as population grows, rents increase as the margin of production is moved outwards and people are forced to work on less productive land. Population growth will also bring about productivity increases through social synergies such as the division of labor, and through technological advances. This will contribute to the raising of wages, but only to the degree that productivity is increased at the margin of production. In our current economic system, land held speculatively out of use for a rise in selling price forces the margin of production out to zero, but this is not shown in the model. Also, while the model shows an economy based around the production of food (for simplicity), the law of rent applies to all forms of production.