RELATION OF LAND INCOME TO LAND VALUE 45 
time, in other words, there is a considerable degree of inelasticity in 
the demand for farms. The number of persons seeking to buy (and 
in any community at a given time is limited. Furthermore, not all 
of these buyers have such low individual rates of capitalization; not 
all of them wish to acquire land ownership regardless of the rate of 
return. The number of buyers, therefore, who are willing to bid up 
the price of land so that it no longer yields a normal rate of return 
is still further limited. A small increase in the number of farms 
offered for sale, then, will materially affect the price, so that it is 
necessary for only a small proportion of the retired farmers to offer 
their farms for sale in order to maintain equilibrium between the 
mortgage rate of interest and the anticipated rate of return on the 
investment in farm lands. 
The mortgage rate of interest is the rate of capitalization in the 
sense that it is the rate that controls most effectively the price that 
is paid for farm land. When it is stated, however, that the mortgage 
rate of interest is the rate of capitalization average conditions are had 
in mind. Individual buyers reach decisions on what they can afford 
to pay for land in different ways. One buyer, for instance, may be 
willing to pay a high price for land because he is willing to accept a 
low rate of return on his investment. He may not be able to make a 
farm earn as much as other prospective buyers, but will pay as much 
as they because of his willingness to accept a low rate of return on 
his investment. Another buyer, on the other hand, may be able to 
make a farm earn a rent that is considerably above the average, but 
because he demands a high rate of return on his investment before he 
will buy, he will not pay any more for land than other farmers who 
can not make land earn so much but who are willing to invest at 
lower rates of return. Thus each individual arrives at the price 
he is willing to pay for a farm on the basis of an individual rate 
of capitalization, an individual estimate as to what rent he can make 
the land earn and an individual estimate of the future changes in 
rents. Thus the prices which buyers are willing to pay are arrived at 
in many different ways. 150 
On the supply side the situation is simpler. Potential sellers 
compare the relative returns to be obtained from selling and investing 
in mortgages with those to be obtained by holding their land and 
leasing it, and their actions cause the average expected rate of return 
on farm land to be fixed at approximately the mortgage rate of 
interest. Those farmers who are less efficient and who have bought 
because of their low individual rates of capitalization will not get the 
average rate of return, that is, a long-run rate of return thai is 
equivalent to the mortgage rate of interest. On the other hand, 
those farmers who are more efficient but who had higher individual 
rates of capitalization will get a long-run return on their invest- 
ments that is above the average. 
This analysis applies to all areas, except the South, where there i> 
a fairly active land market. Where such a market does not prevail 
the influence of the mortgage rate of interest on the rate o( capitali- 
zation of farm lands will be slow and uncertain. In the major agri- 
cultural regions of this country, however, such an active market 
prevails. 
15a See U. J. Davenport, Economics of Enterprise, Ch. XV . 
