Supply and Demand eBook

This eBook from the Gutenberg Project consists of approximately 178 pages of information about Supply and Demand.

Supply and Demand eBook

This eBook from the Gutenberg Project consists of approximately 178 pages of information about Supply and Demand.

Sec.7. Rent and Selling Price.  In this chapter we have spoken mainly of the rent rather than the price of land:  the relation between the two things is fairly obvious and well understood, but it will be well not to close the chapter without a brief account of it.  The price of any piece of land is affected by all the considerations on which its rent depends, but it is also affected by another factor which has no influence whatever upon rent.  This factor is the rate of interest.  The higher the rate of interest, the higher the return which a man could obtain by buying gilt-edged securities, the lower will be the price that he will pay for a piece of land which yields a given rent.  We can express the relation more precisely by the formula Price = (Rent * 100)/(Rate of Interest), though we must be careful, in applying this formula in practice to allow for the possible deviations between the nominal and the true rent, and similar complications.  The price, it must be observed, is derived in this way from the rent, not the rent from the price.[1] Rent is thus logically the simpler, price the more complex thing.  It is well, therefore, to analyze in the first instance the principles of rent, if we live in a country where the practice of leasing land for annual rent is less common than it is in Great Britain, even if, for whatever reason, it is the price of land with which we are concerned in practice.  The problem of price contains two distinct elements which it is not easy to handle when mixed up together.  For the rate of interest represents in itself an important branch of economics, which will require a separate chapter to itself.

[Footnote 1:  In this the rent of land differs fundamentally from that of other things, such as houses.  For the price of a house is largely influenced by the costs of construction of new houses, and should correspond closely to them in the long run.  The same relation between rent, price and rate of interest will hold good; but the rents will be affected by changes in the rate of interest, owing to the reactions of such changes on the supply of houses.]

CHAPTER VII

RISK-BEARING AND ENTERPRISE

Sec.1. Profits and Earnings of Management.  The profits of a business, as they are ordinarily reckoned, whether for the purposes of income tax or of a balance sheet, comprise several elements which are fundamentally distinct.  The relative importance of these various elements varies greatly from one type of business to another.  The profits of a private business include, for instance, the remuneration of the work of management, which in the case of a Joint Stock Company is mostly paid for by salaries or directors’ fees.  It is to their profit that farmers, small shopkeepers, and the partners of a private firm look not merely for a return upon their capital, but for the reward of their own labors.  “Earnings of Management,” as they are usually termed (though in truth they often cover other and humbler forms of labor) are thus frequently one of the ingredients of profits.

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Supply and Demand from Project Gutenberg. Public domain.