The amount of a factor’s earnings that is economic rent depends on the
mobility (and thus on the elasticity of supply) of the factor. In each
case, the equilibrium is determined by the intersection of the demand and
supply curves, and total factor earnings are given by factor price times
quantity, wQ.
In part (i), supply is perfectly elastic, indicating that even a slightly lower
factor price would cause the factor to leave. None of the earnings are
economic rent; all are the factor’s transfer earnings.
In part (ii), supply is positively sloped, indicating that more units of the
factor will be supplied at a higher price. The area below the supply curve
is the amount needed to keep units of the factor in its current use—this
area is the factor’s transfer earnings. The red shaded area above the
supply curve is economic rent.
In part (iii), supply is perfectly inelastic, indicating that the factor has no
other uses. In this case, transfer earnings are zero and all of the factor’s
earnings are economic rent.
When supply is perfectly inelastic, as in part (iii), the same quantity is
supplied whatever the price. Evidently, the quantity supplied does not
decrease, no matter how low the price goes. This inelasticity indicates
that the factor has no alternative use, and thus requires no minimum
Q 2