RENT

Rent is the amount paid for the use of land.

Rent is the payment for the use of only land and is
different from contractual rent which includes the returns on
capital investment made by the landlord in form of wells,
irrigation structures, etc., besides the payment for the use of
land.

Two important theories of rent are

# Ricardian theory of rent
# Modern theory of rent
 RICARDIAN THEORY OF RENT

According to Ricardo, “Rent is the portion of the

produce of the earth which is paid to the landlord for the use
of original and indestructible powers of the soil”.

Ricardo believed that rent takes place on account

of differences in the fertility of land. Rent might too arise on
account of situational benefit even when all lands are
uniformly fertile.
Ricardian rent is also known as pure rent.
It is mainly based on two assumptions:
# Land differs in fertility.
# The most fertile lands are limited in supply.

The three important aspects of the Ricardian Theory of Rent are:

 The Indestructible powers of Soil means that the
Properties of Land cannot be changed by human beings like the
fertility of Land, the nature of the soil. Here he stresses even the
bombs cannot destroy the powers of the land.
His theory of rent is based on the Law of diminishing
Returns.
His theory is based on the increase in the
population.
`
 Eg:
Ricardo described his theory by taking the illustration of
colonization. When some people go and settle down in a place, at first
they will cultivate the best lands. When more people go and settle
down, the demand for land will raise and they will cultivate the
second-grade lands. The cost of production will go up. Therefore the
price of grain in the market should cover the cost of cultivation. In this
situation, the first grade land will obtain rent.
After some time, when there is raise in population, even third
grade lands will be cultivated. Now, even second grade lands will
obtain rent and first grade lands will obtain more rent however the
third grade land will not obtain rent. It is termed as no-rent land or
marginal land.
 According to Ricardo, rent is price determined,
i.e., it is determined by price of the grains generated in the land.
He also believed that rent is high since price is high and not the
other way round. Ricardo came to the conclusion that rent did
not enter price since there are certain no-rent or marginal lands.
Since the produce of no-rent land obtains a price, Ricardo argued
that rent did not enter price.
In figure above, grades of land are shown all along
the X axis and the yield up the y–axis. The shaded region in the
diagram points out rent. In this condition, grade I and grade II
lands get rent. The grade III land will not obtain rent.
 QUASI RENT
Quasi rent is the earning of capital equipments such as
machineries, buildings, etc., which are inelastic in supply, in short
run.
According to Marshall,the quasi rent is only a temporary
surplus ,which is enjoyed by the owner of the capital equipments
in the short run. This is due to the increase in its demand and it
will disappear in long run, if supply of the capital equipment is
increased I response to the increased demand.

Quasi rent = Total revenue earned – Total variable costs

 DIFFERENCE BETWEEN RENT AND QUASI
RENT
# Rent is a payment for natural gifts like land. Quasi rent
is a payment for man made appliances like machines.
# As the supply of land cannot be changed, rent persists
in both short run and long run. But quasi rent is a short run
phenomenon which disappears in the long run.
# Rent is permanent in nature while quasi rent is a
temporary phenomenon.
# Rent cannot be zero but quasi rent can be zero when
the short run price of the commodity equals its average variable
cost.
DEFINITION

Classical Definition
Carver: Rent is the price paid for the use of land.

David Ricardo: Rent is that portion of the produce

of the earth which is paid to the land lord for the
use of original and indestructible powers of the
soil.
Anatol Murad: Rent is that portion of the landlords
income which is attributable to his ownership of
land
DEFINITION
Modern Definition

In modern economic usage, rent is represented as

the difference between the total return to a factor of
production (land, labour, or capital) and its supply
price—that is, the minimum amount necessary to
attain its services.

Boulding: Economic rent may be defined as

payment made to a factor of production in excess of
the minimum amount necessary to keep the factor
in its present occupation.
TYPES OF RENT
1. ECONOMIC RENT: Economic rent may be defined
as payment made to a factor of production in excess
of the minimum amount necessary to keep the factor
in its present occupation.
2. GROSS RENT: It is the rent which is paid for the
services of land and capital invested on it. It
includes the following: (a) Payment for the use of
land (b) Interest on capital invested on it (c) Wages
for the services of land lord for supervising the
investment in land.
3. CONTRACTUAL RENT: It is the payment made to
the land lord by tenants on the basis of some
contract which may be verbal or written. It may be
more or less than the economic rent.
TYPES OF RENT
4. SCRACITY RENT: It applies to all the factors of
production whose supply is less elastic. Scarcity rent
arises due to the scarcity of factors of production.
5. DIFFERENTIAL OR SITUATION RENT: It refers
to the rent arises due to the difference in the fertility
of land. This type of rent arises under extensive
cultivation. The surplus enjoyed by more fertile land
over and above the less fertile land is known as
differential rent.

6. QUASI RENT: According to Marshall quasi rent is the

surplus earned by man made factors of production
whose supply is inelastic or fixed in the short run
but elastic in the long run.
Various economists have proposed different
theories for the origin of rent. Prominent
among the theories of rent are:
(a) Ricardian Theory of Rent
(b) Modern Theory of Rent
 The Ricardian theory of rent follows from the
views of classical writers about the operation of
law of diminishing returns in agriculture. Classical
authors, West, Torrents, Malthus and Ricardo,
each of them independently formulated the theory
of differential rent.
 The classical theory of rent in the form presented
and elaborated by David Ricardo has become
more popular, though the ideas of all of them
concerning the land rent are fundamentally same.
 David Ricardo, a British economist, defined rent
as, the portion of the produce of the earth
which is paid to the landlord for the use of
the original and indestructible powers of the
soil.
 Ricardian rent is also known as pure rent.
 The true economic rent is only a payment for the
use of land. It excludes interest on landlord’s
investment.
 The supply of land is fixed and the existing
quantity of land gifted by nature cannot be
increased or decreased.
 Another assumption is that original powers such
as fertility of land are gifted by God and are not
due to human efforts of any type.

 Land is a non-perishable factor of production. The

powers/qualities of land cannot be destroyed and
the fertility of land never diminishes.
 Land has only one use i.e. Cultivation. There are
no alternative uses of land.
 Different lands have different fertility levels.
 Utilization of land for cultivation is done based on
the order of fertility of land. Most fertile land is
cultivated first before using the next grade land.
 Law of diminishing returns or increasing costs
operates in agriculture.

 Assumption of perfect competition is also made.

 Ricardo assumed the existence of margin land
which is a 'no rent land'. It could be understood
as the grade of land after which no land is used.
 The quantity of land is limited, and so is its
productiveness, and it is not uniform in quality.

 If the superior land will not support the

population, recourse must be made to inferior
lands and the produce is, thus, raised at different
costs.
 The differential advantage of the superior land
over the inferior gives rise to Economic Rent.
 The amount of rent is determined by the degree
of the differences in productivities of land.
According to Ricardo, rent can be determined
under two situations:
a) Extensive Cultivation: It refers to the system
of cultivation wherein more land is used to
increase production.
b) Intensive Cultivation: It refers to the system
of cultivation where large amounts of labour
and capital are used in same piece of land
for increasing production
 Differential Rent
 By Ricardo : “Rent is that portion of the produce of
the earth which is paid to the landlords for the use
of original and indestructible powers of the soil.”
 By Example :
Grades of Yields in Price in Total
land Quintal per Quintal ($) Returns ($)
Acre
A 50 50 2500

B 35 60 2100

C 20 70 1400

D 15 80 1200
 Differential Rent
Graph :
For A ,
50-15 =35
For B ,
35-15=20
For C ,
20-15=5
For D ,
15-15=0
 Differential Rent
Critical Appraisal : -
1.”Original and indestructible Powers”
2.Use of term Fertility.
3.No-rent land.
4.Best lands cultivated First.
 Scarcity Rent
 Ricardo's theory explains why one land commands
higher rent than another. But it fails to answer how
rent arises. The modern economist has evolved a
theory called the Scarcity Rent.
 According to it, rent arises due to the relative scarcity
of land in relation to its demand. The greater the
demand for land the higher shall be its rent. Thus Rent
is the resultant of the interaction of the forces of
demand and supply in relation to land. The modern
theory of rent is also called on the demand and supply
theory.
 Scarcity Rent
Demand Side
 The demand for land is derived
from the demand of the
products of land.
 If the demand for products
increases, there will be a
corresponding increase in the
demand for the use of land.
 The demand curve for a factor
slopes downward from the left
lo the right.(Law of Marginal
Productivity).
 The downward sloping
demand curve expresses that
more land will be demanded at
lower rent.
Supply Side
 The supply of land is fixed.
Thus increased rent cannot
increase supply. Nor fall in
price of land can decrease its
supply.
 Supply of land is negligible. It
represents a case of perfectly
inelastic supply- The rent may
rise or fall but the supply of
land remains the same.
 Rent is determined at the point
where demand for and supply
land intersect each other.
 Quasi-Rent
 The concept of Quasi-Rent was given by Marshall.
 It is the surplus earned by the instruments of
production other than land.
 It stands for the whole of the income which some
agents of production yield when demand for them
suddenly increased.
 It is earned when Supply cannot be increased in
response to an increase in the demand for them
, hence this is a Short Term concept.
 Quasi-Rent
Graph :
SS is the absolute inelastic supply.
SS cuts DD the demand curve at E.
So OP is the price when supply is OS
for a normal demand.
But when the demand increases to
DD’ in a short run price changes to
OP’ being supply constant at OS .
So the change from OP to OP’ is the
quasi rent.
In the long run the supply is totally
elastic represented by PL so supply
changing to OM price keeps to be
OP so thus no change in price and
no quasi rent .
