15.20 : Equilibrium Rent: The Market for Capital

Capital is a factor of production used to produce goods and services. This includes the equipment and structures that are used to produce goods and services. Examples of capital for a manufacturer could include the factory building, machinery, robotics, and tools. For farmers, capital items could include tractors, harvesters, and other equipment. Capital could also include intangible objects like computer software, which are used in the production of goods and services.

Capital items can be purchased or rented. In the current situation, the rental price of capital is examined to help keep the analysis simple.

For example, a farmer may rent tractors for the farm. This demand for tractors is represented by a downward-sloping curve, which illustrates how the number of tractors demanded decreases as the rental price for tractors increases, and vice versa. Like labor, the rental price reflects the marginal revenue product of capital.

The supply curve for tractors is upward-sloping, indicating that more tractors are offered for rent as the rental price increases, and fewer tractors are offered for rent as the rental price decreases.

The equilibrium rental rate is the price at which the quantity of tractors demanded by farmers equals the quantity of tractors supplied by the suppliers. It is determined at the intersection of the demand and supply curves for tractors.

The equilibrium quantity for tractors is the number of tractors rented at the equilibrium rental rate. It is the point where the quantity of tractors demanded by farmers matches the quantity of tractors provided by the suppliers. At this quantity, the market clears, meaning the amount of tractors farmers are willing to rent equals the number of tractors suppliers are willing to provide.

This analysis helps to understand the linkages between factors of production.