Land
Land: Anything provided by nature which is used in the
production of goods and services.
Examples: Agricultural land, oil, gas, forests, lakes, rivers, seas, fish stocks, mines, etc.
Classification of Land Resources
Land can be subdivided into two very broad categories:
A. Renewable Resources
Definition: Renewable resources are those resources, the supply of which can be replenished.
Examples: Forests, solar power, fish stocks, etc.
Important Note: When referring to renewable resources, there is an implication that these resources
are only renewable if they are properly managed. If they are properly managed, then their supply
can be infinite in the long run. As such, using some of these resources up today means that there is
still an infinite amount of them left for future generations. However, over-exploitation of renewable
resources can cause them to become non-renewable resources.
B. Non-Renewable Resources
Definition: Non-renewable resources are those resources which cannot be replenished.
Examples: Oil, gas, mineral wealth, etc.
Implication: It is implied in the definition that an increase in present consumption of these resources
means that there will be less of these available for future generations.
The Economic Characteristics of Land
Land, as a factor of production, possesses distinct economic characteristics that set it apart from
labour, capital, and enterprise.
1. Land is Fixed in Supply: Nature has provided only a certain amount of land, and this cannot
be increased by man. The total quantity of land is absolutely fixed.
(A graph would be inserted here showing a perfectly inelastic (vertical) supply curve for land.
Price is on the vertical axis, Quantity of Land is on the horizontal axis, and the Supply curve
(S<sub>L</sub>) is a vertical line. An increase in demand from D1 to D2 leads to a significant
increase in price from P1 to P2, with quantity remaining fixed at Q<sub>L</sub>.)
2. The Price of Land Does Not Affect the Quantity Available: This is unusual for factors of
production. In the case of labour, if wages fall, the supply of labour may increase or decrease.
However, because the supply of land is fixed, changes in its price (rent) have no effect on the
total quantity of land available.
3. Land has No Cost of Production: This is because land is a gift of nature. It was not produced
by man. As such, all earnings from land are considered an economic rent from society's point
of view.
4. Land is a Non-Specific Factor of Production: This means that it is not confined to one specific
use, but its uses can change over time. For example, agricultural land can be re-zoned for
residential or commercial use.
Economic Reward: In economics, we say that the return on land is RENT. This is the reward in
economic terms to the owner of land being used in the production of goods and services.
Rent (Land Prices) is Price Determined, not Price Determining
This is a crucial concept in the economics of land. Unlike most goods and services, where the cost of
production helps determine the price, the price of land (rent) is determined by the value of what can
be produced on it.
Explanation:
The return on land (rent) is determined by the Market Value of what can be produced by using that
plot of land.
● When house prices in a city are high, the price of land in general is also high. People
(property developers) are aware that if houses are built on that site, people will pay high
prices for those houses. Therefore, property developers can afford to pay higher prices for
that land, as they will receive a high return when they sell the houses.
● When house prices are low, the price of land is low. Property developers know that they will
not receive a high return when they go to sell houses built on that land, so they cannot
afford to pay high prices for the land.
Example 1: City Centre vs. Suburban Rent The rent on cafés in Dublin city centre is far higher than
the rent on cafés in the suburbs. The reason for this is that a café in the city centre can charge higher
prices and receive more customers than one in the suburbs, and as such, make a greater profit than a
café in the suburbs. The higher potential profitability (MRP) of the city centre location allows the café
owner to pay a higher rent.
This is what "price determined" means. It is the level of demand for what the factor produces (the
final good or service) that decides the price of that factor (in this case, land). The price of land is
derived from the price of the goods and services produced on it.
Example 2: The Impact of Re-zoning on Land Value During the building boom in Ireland, residential
land was very valuable in Dublin. Local councils would zone land for a particular use: commercial,
residential, greenbelt, etc.
Many plots of land that were designated as greenbelts might be worth €100,000. Due to a massive
increase in the demand for residential housing, many areas that were zoned as greenbelts were
re-zoned as residential land. This caused the value of land that was worth €100,000 before re-zoning
to be worth €1,000,000 after it.
Reason: The value of what could be produced on the land when it was zoned as residential (the price
of houses) was far higher than what could be produced on the land when it was zoned as greenbelt
(essentially nothing, or very low-value agricultural output). This increase in the potential value of the
output caused an increase in the value/price of the land itself.
This is an example of the Marginal Revenue Product (MRP) of land increasing due to an increase in
the selling price of houses, thus causing rents (the payments received by the owners of the factor of
production, land) to rise. The price of land (rent) will rise faster than any other factor of production,
given the same increase in demand, because the quantity of land is fixed (perfectly inelastic supply).
Summary of the Principle:
● We know that the demand for land is a derived demand.
● Its MRP (Marginal Revenue Product) is the main factor governing its price. This is because
supply doesn't change.
● The price for anything in a free market is determined by the intersection of the supply and
demand curves. The demand curve for a factor of production is its MRP curve.
● For a given Marginal Physical Product (MPP), changes in MRP will be related to changes in
the selling price of the good produced on that land.
● Therefore, the higher the selling price of what is produced on that land, the higher the
MRP. The higher the MRP, the more valuable the land.
● This leads to the conclusion that land prices or rent are price determined (by the value of
the final product), not price determining (for the final product).
How a Builder Determines the Maximum Price to Pay for Land (Practical
Application)
The concept of land being "price determined" can be seen in how a builder calculates the maximum
price they can pay for a plot of land.
1. Firstly, he decides what type of houses to build.
2. He then works out the number of these houses that he can fit on the site and their likely
selling price.
3. He can then calculate his potential Total Revenue (TR). (e.g., Number of Houses × Selling
Price per House)
4. He then works out the building cost per house, and from that, he can calculate the potential
Total Cost of the project, excluding the cost of the land. This includes materials, labour,
marketing, finance costs, and his desired profit margin.
5. This allows him to calculate the potential Total Cost of the project, excluding the cost of the
land.
6. He then subtracts the potential Total Costs (from step 4) from the potential Total Revenue
(from step 3).
7. The builder can pay up to the difference between the two for this plot of land. This
difference is the maximum price payable for the land.
The Price of Land can be Determined with the Following Formula:
$$ \text{Potential Total Revenue} - \text{Potential Total Cost (excluding land)} = \text{Maximum Price
Payable for the Land} $$
This formula clearly demonstrates that the price of land is determined by the revenue it can
generate. Again, Land is Price Determined, not Price Determining.
The demand for land is a derived demand. It is demanded for its contribution to the production
process. The demand for land will decrease if there is a decrease in the demand for housing,
commercial property, etc.
Reasons Why Prices of Land for Housing Development have Fallen in Recent Years
in Ireland
Several factors have contributed to the significant decline in land prices in Ireland following the
property boom.
1. Deflation: The general decrease in prices in the Irish economy has resulted in a decrease in
land prices.
2. Recession: High unemployment and falling incomes have significantly reduced the effective
demand for housing.
3. Uncertainty: Uncertainty about job security and the future economic outlook has stopped
people from 'trading up' to larger houses or entering the property market for the first time.
4. Credit Crunch: Difficulty in getting mortgages due to stricter lending rules by banks has
resulted in a sharp decline in the demand for housing.
5. Emigration is Rising / Immigration Declining: Net emigration has resulted in a drop in the
population and, consequently, a drop in the demand for housing.
6. Reduced Speculation in Property: The economic recession, combined with the introduction
of new taxes like the Property Tax, has resulted in a decline in speculative demand for
housing and a resulting fall in the price of land.
7. Overcapacity in Housing Market: Supply now exceeds demand, with many vacant properties
(ghost estates) existing. This overhang of unsold properties means there is little need for new
construction, and hence, the demand for land for new development has decreased
significantly.