RENT

Ricardian Theory of Rent: Differential Rent Modern Theory of Rent: Scarcity Rent Quasi Rent

Concept of Rent

Rent refers to the compensation for the use of somebodys belongings for a period of time. In economics, the term rent originally meant the payment for the productive use of land. Modern economists define rent in a broader connotation Rent is the surplus earned by a factor over and above the minimum earnings necessary to induce it to continue its work.

Contract Rent

A contractual payment agreed upon the right for using a durable goods over a stated period. Contract rent includes economic rent plus elements of interest on capital service charges, profits, etc. Also termed as Gross Rent. Contract Rent = Economic Rent + Interest + Wages + Depreciation + Profits

Economic Rent

Economic rent is the pure rent payable as the return of land alone, for its use. To classical economists, Economic rent was applicable to land alone. To modern economist, economic rent means income or yield derived from any factor whose supply is inelastic. Economic rent is thus the surplus over supply price of the factor in terms of its opportunity cost. Economic rent = Gross Rent (Interest + Wages + Depreciation + Profits)

Ricardian Theory of Rent

Ricardo

believed

Land is a free gift of nature, rent is a true surplus, it is paid as the surplus over the cost of cultivation. Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible power of the soil. Rent is a differential surplus earned by more fertile plot of land.

Ricardian Theory:Assumptions

Land is free gift of nature hence no supply price. Supply of land is fixed and perfectly inelastic. Demand is the sole determining factor for rent. Land is a heterogeneous factor of production. Technique of production is given and unchanged. Land is subject to the law of diminishing returns. There is perfect competition for the use of land.

Ricardian Theory of Rent

Rent emerges on account of the difference in the quality of land. Superior lands yields a surplus due to their differential advantages in production over inferior or less fertile ones. The theory is also known as theory of differential advantage or theory of differential rent.

20000-6000= 14000

14000-6000= 8000

10000-6000= 4000

6000-6000= No rent

20

Rent Surplus

Intra-Marginal Land Rent Surplus Marginal Land (No Rent Land) Rent Surplus
Input cost

Output / return

14

10

Types of Land

Ricardian Theory of Rent

Land A
MC Rent AC

A P=AR=MR
S

Produce

Ricardian Theory of Rent

Land B
MC Rent AC

B P=AR=MR
S

Produce

Ricardian Theory of Rent

Land C
MC rent AC

C P=AR=MR
S

Produce

Ricardian Theory of Rent

Land D
MC Rent AC

D P=AR=MR

Produce

Ricardian Theory

Rent is a surplus payment. Rent is a differential surplus yield of more fertile land as against less fertile land. Rent arises because of differential fertility of land Super quality lands yield rent against marginal lands that are relatively inferior. Rent is price-determined and not pricedetermining.

Ricardian Theory

Corn is not high because rent is paid, but rent is paid because corn is high. Rent rises when price of land output rises and not that price is high because rent is high. Rent does not enter price of the produce of land is an important corollary. More fertile land earns surplus return as rent; marginal land fetches not rent, hence rent does not enter price. Hence rent is a differential surplus.

Ricardian Theory: Criticisms

The definition of rent has been criticised,

payment made for the use of original & indestructible power of soil.

In the present atomic era, one cannot claim anything to be indestructible. Ricardo believed that land is cultivated in a particular order from most to least fertile. Lands which are most convenient are cultivated first. Ricardo emphasised rent is payment made for the use of original & indestructible power of soil. It is difficult to ascertain which powers of the land are original and which are not.

Ricardian Theory: Criticisms

If no-rent land exists, it would be difficult to measure differential rent of intra-marginal lands The assumption of perfect competition is unrealistic. For Ricardo, rent is not a component of the cost of production. Modern economists disagree that rent does not exist in price. The modern view is rent cannot be price-determining, but it is pricedetermined. The modern view believes that Rent would arise even if lands are of the same quality. Rent arises due to inelastic supply of a factor.

Modern Theory of Rent

Rent arises due to scarcity of land.

all lands, inferior or superior do fetch rent, thus the assumption of marginal rent as no rent land doesnt hold water Demand and supply forces determine rent. Rent emerges even if all land is homogenous due to scarcity of land. Supply of land is perfectly inelastic. Rising population intensifies the relative scarcity leading to further rise in the price of land. Scarcity rent is demand determined.

Whats similar between Ricardo and Marshall ?

Like differential rent, scarcity rent is the producers surplus. The concept of differential rent also contains the element of scarcity. All rents are scarcity rents, and all rents are differential rents. Alfred Marshal

Modern Theory of Rent

Scarcity Rent

Rent

R3

R2

D3

D2 R1

D1 O Q Quantity of Land

Modern Theory of Rent

Rent is generalized surplus earned by all factors.

Rent is surplus earning of a factor in excess of its supply price to attract it into the particular use becomes a generalized surplus. The rent depends on the relative degree of inelasticity of supply. A factor earns rent till its supply remains less than perfectly elastic.

To modern economist, Rent is not the peculiar earning of land alone. Income earned by any factors due to scarcity in a given period of time is rent.

Modern Theory of Rent

The concept of Transfer Earnings to measure the surplus Rent is a surplus, earned by a factor, is measured with reference to transfer earnings, in the prevailing employment. Transfer earnings are the opportunity cost of factor. Economic Rent = Current earning of a factor Its transfer earning.

Quasi Rent

Short run earnings of some factors of production, especially man-made instruments are fixed in supply in the short run. In the long run their supply is elastic. In the short run when the demand increases, their income rises and they earn surplus. But in the long run as the supply becomes elastic the surplus earned by these factors disappears. Though the earnings look like rent it cannot be regarded as rent. Marshall therefore called it quasi rent.

Quasi Rent

Quasi rent is thus a short term temporary surplus earnings of some factors. Quasi rent of a machine is its total short period receipts less the total costs of hiring the variable factors used in association with it to produce out put and of keeping the machine in running order in the short run. -Stonier and Hague

Quasi Rent

To a firm the surplus of revenue received over the variable costs incurred in producing output in the short run is quasi rent. QR = STR STVC Thus, any part of fixed cost covered by the price in the short run is broadly treated as quasi rent. Quasi rent is price determined. Quasi rent is different from supernormal or normal profits. Supernormal profits = Price ATC. Profits can be negative, but quasi rent cannot be negative because price is less than AVC the firm will no longer remain in the business.

Quasi Rent
P3 P2 P1

Modern Theory of Rent

AC MC E3

Price/Cost

D=AR3=MR3
E2 AVC

D=AR2=MR2 D=AR1=MR1 D=AR=MR

E1
E

Q Q1 Q2 Q3

Quantity