ECO333H1 Lecture Notes - Lecture 3: Isocost, Exogeny, Hectare

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In what follows here, we will elaborate on the analysis of land-market equilibrium with factor substitution, as outlined in o"sullivan"s text. Chapter 6 of the text, we derive the model"s endogenous variables from its exogenous variables. Factor substitution refers to firms" ability to substitute capital for land at locations where land rent is relatively high rather than using fixed land and capital inputs regardless of land rent. The factor-substitution model in the text considers firms that occupy office buildings. However, a factor substitution model can apply to any type of firm. In these notes, factor substitution can be switched on or off so that its impact on endogenous variables can be isolated. A zoning law controlling firms" land input is the tool used to switch factor substitution on or off. Firms in the textbook model sell information products to their customers. Customers might be paying for financial advice or legal advice two examples of information products.

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