What effect does an increase in the supply of capital have on the real rental price of capital?

An increase in the supply of capital generally leads to a decrease in the real rental price of capital. This outcome is rooted in the basic economic principle of supply and demand. When the supply of capital increases, there is more capital available for use in production. Assuming demand for capital remains constant, an overabundance of capital puts downward pressure on the prices for using that capital – in this case, the real rental price.

The real rental price of capital is determined by the market equilibrium where the quantity of capital demanded equals the quantity supplied. With an increase in supply, the market will adjust to the new condition by lowering the price to encourage usage and balance out the supply-demand equation. Thus, as more capital becomes available, it becomes less expensive to rent or utilize that capital, leading to a lower real rental price.

In summary, when there is an increase in the supply of capital, the real rental price decreases due to the shift in the supply curve resulting in a new equilibrium where the rental price is lower.