Is producer surplus a rent?
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Is producer surplus a rent? book
Any point along this rising supply price for the product indicates the minimum average (inclusive) cost for each of the firms in the industry and, therefore, the
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1 in Figure 9.1, x1m1. A typical long-period envelope curve for such a firm is represented as S1S1. At the larger outputOx2, the minimum average inclusive cost for the industry is given by x2m2, and the typical long-period envelope curve for the firm is represented by S2S2. Clearly then, this long-period industry supply curve cannot be interpreted as a net gain by the producers of this particular good, as each of them makes zero (Knightian) profit3 in long-period equilibrium. It is, in fact, a curve of average cost including rent. Since real rentals (the price of units of capital) rise and – unless there are
increasing returns to scale – real wages fall as the output of x is expanded, we are able, under particular monetary assumptions, to calculate the rise in money rentals and the fall in money wages corresponding to increased amounts of capital and labour required by some given increase in the quantity of the product x. We can then associate the increase in the area above the supply curve of x with the increased amounts of the two factors employed in the x industry when each factor is multiplied by the increase or decrease in its income. More specifically, the addition to the area above the supply curve for x is made up of the gains of only those units of capital now employed in x less the losses of only those workers now employed there. These gains and losses in x alone are clearly only a small part of
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since they are It is certain, therefore, that any increase in the area above the supply curve for
x is not to be associated with a net gain by either factor or by both factors taken together or by the producers.4