L4: Ch. 5: Land Market Fundamentals Flashcards
What is Bid Rent?
Bid rent is the maximum amount a firm or household is willing to pay to use a parcel of land for a given amount of time.
What determines the highest and best use of land?
Bid Rent - the maximum amount a firm or household is willing to pay to use a parcel of land for a given amount of time.
What is an opportunity cost?
The value that someone gives up to get something else
In a competitive industry and in the long run, what economic profit do firms earn?
They earn normal profit/ zero economic profit
What is the profit equation for a firm?
profit(π)= (p*q) - Cq
p- price
q- quantity
Cq - total costs
What is the long run profit max condition for a firm?
Price(marginal revenue) = marginal cost
also
Price = Average Total Cost
P = MC = ATC
What does zero economic profit mean?
Zero economic profit actually means that a normal profit is earned. That is because zero economic profit includes a degree of return on investment.
It is a condition where accounting for opportunity costs, revenue minus costs = zero
What is the Leftover Principle?
After non rent costs are paid, any economic profit will go to the land until all economic profit is used up.
What is the Residual Land Value?
The value that is left over after accounting for all other costs of production; the equilibrium land rent for a property in its highest and best use
What is the Absorption Rate?
The rate at which real estate units are sold in a market during a particular time period
What is a Spatial Equilibrium?
A situation where there is no incentive or tendency for a firm to change locations
In a competitive market what is a firm’s bid rent equal to?
A firm is willing to bid all economic profit. (Revenue minus all other costs of production)
What is the equilibrium land rent?
The highest bid rent among users competing for land
What are the fundamentals of a land market?
i) Bid rent is the max amount a firm is willing to pay = economic profit before considering land
ii) Bid rent varies between locations to offset any advantage one location has over another
iii) In general we expect land to be rented/sold to the highest bidder
iv) Equilibrium land rent is the highest of the bid rents for a parcel
What is equilibrium land use?
The type of business or land use preferred for the land’s highest bidder.
