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Difficulty: MediumFactors of Production and Their Rewards

Unlike capital, which is a man-made agent of production with an elastic supply, land is fixed in total supply to the overall economy, meaning its economic reward is entirely demand-determined.

Answer: Answer

Answer

The statement is true because the total supply of land is fixed (perfectly inelastic) to the economy as a whole, making its economic reward (rent) entirely dependent on demand.
Land is a primary factor of production provided by nature without human cost. Because its overall quantity cannot be expanded, its supply is perfectly inelastic, causing its economic reward (rent) to be governed entirely by demand.

Step-by-Step Solution

1
Analyze the fundamental characteristics of capital versus land.
Capital consists of man-made physical or financial assets whose supply can be increased or decreased over time, whereas land is a natural factor whose overall supply is physically fixed.
Identifying the supply characteristics of factors of production determines how their economic returns are structured.
2
Examine the price-determination mechanism for a factor with fixed supply.
Because total land supply cannot adjust in response to price changes, the economic rent accrued to land owners is dictated solely by the level of demand from producers.
When factor supply is completely inelastic, supply curves are vertical, making market price a direct function of demand.

Key Concept

Inelasticity of land supply and demand-determined rent
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Topics

Factors of Production and Their Rewards

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