Consider the following:
(i) Suppose a competitive industry has some factor of production whose supply is perfectly inelastic. As the demand for the industry's product rises and falls, what happens to the factor's employment and its rent?
(ii) Repeat part i for the case where factor supply is perfectly elastic.
(i) A factor with a perfectly inelastic supply earns its entire factor payment as rent. As the demand for the industry's product rises (or falls), the price of the firms' output rises (or falls). This raises (or lowers) the firms' demand for the factor. Since supply is perfectly inelastic, the quantity supplied of the factor does not change, but the factor's price and its rent both rise (or fall).
(ii) A factor with a perfectly elastic supply earns zero rent-the entire factor payment just covers the opportunity cost of supplying the factor. Rises and falls in the demand for the industry's output again result in rises and falls in the demand for the factor. In this case, however, employment rises and falls, while the factor's rent remains equal to zero.
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