Answer:
Step-by-step explanation:
Assuming that the labor productivity is held constant, the supply of capital and the demand for capital can be graphed together. The demand for capital curve (KD) slopes downward, indicating that as the price of capital (R) decreases, the quantity of capital demanded increases. The supply of capital curve (KS) slopes upward, indicating that as the price of capital increases, the quantity of capital supplied also increases.
If the rent supply of capital (R) is low compared to the demand for capital (KD < KS), this indicates that there is excess demand for capital in the market. As a result, the forces of competition will cause the rent to adjust until the demand for capital is equal to the supply of capital (Dx = Sx).
Initially, the rent will be below its equilibrium level, as there is more demand for capital than there is supply. This will cause firms to compete for the limited capital, driving up the rent. As the rent increases, firms will become less willing to demand capital, as it becomes more expensive to do so. Simultaneously, the higher rent will incentivize suppliers of capital to increase their supply, as they can earn a higher return on their investment.
As the rent continues to increase, the quantity of capital demanded will decrease while the quantity of capital supplied will increase, eventually reaching a point where the demand for capital is equal to the supply of capital. This point is called the equilibrium rent (R*), and it represents the price at which the quantity of capital demanded is equal to the quantity of capital supplied.
At the equilibrium rent, the forces of competition have caused the market to clear, and there is no excess demand or supply of capital. This represents the point where the demand curve and the supply curve intersect.