Question

Land Prices Reflect High Commodity Prices As their family grows, the Steens are finding it more difficult for the next generation to stay in ranching. "The problem is they don't create any more land," Steen said. As the prices for cattle, corn, and other commodities climb, so does the value of land in South Dakota. Source: Rapid City Journal, January 30, 2012 a. Why does the price of land in South Dakota keep rising? In your answer include a discussion of the demand for and supply of land. b. Use a graph to show why the price of land in South Dakota increased over the past decade. c. Is the supply of land in South Dakota perfectly inelastic?

Short answer

The price of land rises due to increasing demand driven by higher commodity prices, while supply remains relatively fixed. The supply of land is highly inelastic but not perfectly inelastic.

Step-by-step solution

- Identifying the Demand Factors

The price of land in South Dakota keeps rising because as the prices for commodities like cattle and corn increase, the profitability of using land for these purposes also increases. This leads to an increase in the demand for land. Higher commodity prices make land more valuable as it can generate higher returns.

- Analyzing the Supply of Land

The supply of land is relatively fixed because you can't easily create more land. Developing additional land often involves significant time, regulations, and cost, so the quantity of land available for ranching doesn't increase quickly.

- Combining Demand and Supply

When the demand for land increases due to higher commodity prices but the supply remains relatively fixed, the price of land increases. This is an example of how both the demand and supply influence land prices.

- Drawing the Supply and Demand Graph

Draw a graph with the vertical axis representing the price of land and the horizontal axis representing the quantity of land. The supply curve will be almost vertical to show its inelasticity, while the demand curve will shift to the right indicating increasing demand. The intersection point of supply and demand curves will show the increased price of land over time.

- Discussing Perfect Inelasticity

The supply of land in South Dakota is not perfectly inelastic because, in the very long run, it is possible to develop more land or change land use. However, it is highly inelastic in the short to medium term because it is difficult to increase the quantity of land quickly.

Key concepts

demand for land

To understand why land prices in South Dakota are rising, we first need to look at the demand for land. Demand refers to how much of a good or service people want to buy at various prices. When it comes to land in South Dakota, many factors influence demand.
One major factor is profitability. As the prices for commodities like cattle and corn increase, there's more money to be made from using the land for these activities. This higher profitability makes the land more desirable. When more people want to buy land, the demand increases.
Another factor is population growth. As families like the Steens see their families grow, there's a higher demand for more land to support the additional activities and living space. This too pushes up the demand for land.
When demand increases but supply stays the same, prices go up. So, increasing demand for land in South Dakota is a key reason why land prices are rising.

supply of land

Now let's talk about the supply of land. Supply refers to how much of a good or service is available for people to buy. Unlike other goods, you can't easily increase the supply of land.
The total amount of available land is relatively fixed. There are physical, legal, and environmental constraints that make it hard to increase land supply quickly. In South Dakota, most of the arable land is already in use for farming or ranching. Converting additional land for these uses can take a lot of time and money.
Because of these constraints, land supply is considered inelastic. This means that the quantity of land available doesn’t change much in response to price changes. As a result, even a small increase in demand can lead to a significant increase in prices.

commodity prices

Commodity prices are a crucial factor that impact land prices. A commodity is a raw material or primary agricultural product that can be bought and sold, such as cattle or corn.
When commodity prices are high, the land that produces these commodities becomes more valuable. This is because higher commodity prices lead to higher profitability from producing those goods. Farmers and ranchers are willing to pay more for land if they expect to make more money from it.
In South Dakota, the prices of cattle, corn, and other agricultural products have been increasing. This trend makes land more attractive to investors and farmers, driving up the demand for land.
Consequently, higher commodity prices are a major reason why land prices in South Dakota keep rising.

inelastic supply

The concept of inelastic supply is key to understanding why land prices are rising in South Dakota. Inelastic supply means that the quantity of a good available does not change much in response to price changes.
For land, this is because you can't easily create more of it. The amount of usable land is fixed and can't be increased quickly. In the case of South Dakota, developing additional land involves significant time, regulations, and costs.
Since the supply of land is inelastic, any increase in demand leads to higher prices. Even if people are willing to pay more, there's not much more land available. This makes the available land more expensive.
While the supply of land is not perfectly inelastic—meaning it can change a little over a long time—it's highly inelastic in the short to medium term. This contributes to the rising land prices in South Dakota.

land valuation

Land valuation refers to the process of determining the economic value of a piece of land. Several factors influence land valuation, making it important to understand why land in South Dakota is becoming more expensive.
Firstly, location plays a big role. Land close to urban areas or with good access to amenities will typically be valued higher. However, even rural land in South Dakota has seen increases in valuation due to commodity prices and profitability.
The potential uses of the land also affect its value. Land that can be used for high-value crops, grazing, or even potential future development will be valued more. In South Dakota, as commodity prices rise, the land's potential to generate higher returns boosts its valuation.
The fixed supply and growing demand, as mentioned earlier, further drive up the land's value. Understanding these concepts helps explain why land prices in South Dakota are continually rising.