A Brief Introduction to Economic Concepts

Edward J. Dodson

[An unpublished paper; date written not recorded]

The Cartesian Coordinate System

The basis for graphing the relationship between economic factors with positive values

Factors of Production

Everything we produce starts with nature, or "land," as the primary factor of production.

Land includes locations we build on, natural resource lands, the oceans and rivers and even broadcast frequencies for television and radio transmissions. In terms of "labor" and "capital goods," land has a zero production cost (i.e., land exists independent of the other two factors of production). Labor is the second factor of production and is what people bring to the production process, both physical and mental. A person's set of skills and abilities contributes to the productivity of labor (i.e., to the individual ability to produce "wealth" from land). Capital goods are the tools, including plant and equipment, computers, etc. utilized in the production of goods. In a primitive economy capital goods are few and basic. In a modern economy, capital goods make it possible for many people to earn a living without actually producing goods to be consumed. Money is not one of the factors of production; rather, money is a "medium of exchange" and a "storehouse of value." Money is an externality to production that greases the wheels of exchange and makes global trade possible. There is no society today that requires by law that the issuance of paper currency be redeemable for a fixed quantity of goods, as when the first banks took in gold and silver bullion or coins and issued "certificates of deposit" in return.

SUPPLY AND DEMAND CURVES

Graphs are easy ways to show how changes in prices affect the supply of and demand for goods and services in a market. Economists look first at what are called "purely competitive markets," which to some economic theorists means there is no government interference, while to others the role of government is to prevent the introduction of monopolistic practices. How rules and regulations and taxes impact markets is then compared to the purely competitive market to help determine whether given policies ought to be adopted or not.

The Theoretical Land Market

The theoretical supply curve for land is vertical, meaning that there is no way to (materially) increase the supply as the price people are willing to pay climbs. Economists say that the supply of land is "inelastic."

The Land Market as it Works Today

As prices for land are increasing, there is a "tendency" for those who control land to hold it off the market in anticipation of further increases. Thus, the supply curve for land actually leans to the left rather than being vertical. This is what land hoarding and speculation causes. With this artificial scarcity created, land prices for the land that is either undeveloped or underdeveloped will tend to increase even more.

The Market for Labor

Labor responds very directly to increases in the price the market (employers or customers) are willing to pay for labor. Wages will tend to rise when there are not enough people who have a particular skill set to fill the available jobs and tend to fall when more people are competing for specific types of jobs than are available.

The Market for Capital Goods

Capital goods markets are, generally, price sensitive (similar to that of labor markets). As demand for capital goods rises, producers respond to willingness of businesses to pay more by producing more. More producers enter the market and prices paid for capital goods tend to fall.

The Market for Financial Reserves

Today's financial markets are extremely efficient in the United States and in some other countries. Credit is generally always available at some price (what we generally think of as "interest"). And, those who need credit may be willing to absorb lower profits in the short run -- paying more for credit than their business plan warrants -- because they know the markets will move up and down within a limited range, subject to intervention in the United States by the Federal Reserve and Federal government. A secondary market for many types of loans made by financial institutions also enhances the liquidity of the market and adds to its stability. As a result, the curves are less steep for financial reserves than for either labor or capital, generally.

Land Market and Tax Policy

Every parcel of land has a potential rental value in the market. When land parcels are held out of use by owners (whether the owner is a private person, a company, some other entity or government), the owner is foregoing an income stream; however, that income stream is potentially there. Other investors will recognize this potential (i.e., imputed) rental value and use a current market rate of return to capitalize the rental value into a sales price. The owner of the land may or may not accept offers at this capitalized price because of expectations that future land values will increase at a faster rate than has been the case up to that point.

The practice of holding land off the market for speculative future gain is made financially more attractive when government permits the imputed annual rental value to go untaxed (or largely untaxed). In general, the potential use of land does not diminish with time. Unlike labor, which must be continuously at work in order to produce wealth (and which tends to deteriorate in productivity as people age), or capital goods, which begin to lose productive capacity almost as soon as they are put to use, there is no similar deterioration of land in its role as the source of wealth or as a location on which to construct wealth.
In order to create market conditions where land is brought to its highest and best use and continuously improved as demand changes, societies must impose a near-100 percent rate of taxation on the imputed rental value of land, so that there is little or no financial gain attached simply to the control of land. When the tax rate is combined with a process of annual reassessment of location values, none of the imputed rental value is left in private hands to be capitalized. The selling price of land will theoretically fall close to zero, although there are good reasons why producers would pay for the privilege of acquiring control over specific parcels for later development.