Figure 13-4 The Determination of Rent in Factor Markets
How Much of Factor Earnings Is Rent?
In most cases, as in the three previous examples, economic rent makes up
part of the factor’s total earnings. From the definitions just given,
however, note that total earnings for any factor are the sum of its transfer
earnings and its economic rent.
A factor’s transfer earnings plus its economic rent equals its total earnings.But how much of total earnings is economic rent? A different but related
question is, How much would the factor price have to fall before the
factor left its current use?
The possibilities are illustrated in Figure 13-4. When supply is perfectly
elastic, as in part (i), the factor is extremely mobile between various uses.
In this case, all of the factor’s income is transfer earnings and so none of it
is economic rent. If any lower price is offered, nothing whatsoever will be
supplied since all units of the factor will transfer to some other use.
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