Qualitative Aspects of Business

Economics

Presented by:
Dr. Vishal Sharma
Assistant Professor
Institute of Business Management
 What do we understand by the term
Rent?
• In economics, the term ‘rent’ is applied only for payment made for factors
of production which are perfectly inelastic in supply. (example Land)

• According to classical economist David Ricardo,

“Rent is the price paid to the landlord for
the use of the original and indestructible power of soil”.

BCMC0009: Qualitative Aspects of

Business Economics
 What do we understand by the term
Rent?
• According to modern economist Joan Robinson, part of the income or total
income of each factor of production can be rent. Income received by land alone
cannot be called rent.

• Modern theory of rent is based on the concept of Transfer Earning.

“Transfer Earning is the minimum earning which a factor must get in its existing
job otherwise it will transfer itself to another job where he/she is likely to get this
minimum earning”
BCMC0009: Qualitative Aspects of
Business Economics
 Definitions of Rent

Classical Definitions:
“Rent is the price paid for the use of land”
- Carver
“Economic rent is the payment for the use of the scarce natural resources”
- Jacob Oser
“Economic rent is that portion of a landlord’s income which is attributable to
his ownership of land”
- Anatol Murad
BCMC0009: Qualitative Aspects of
Business Economics
 Definitions of Rent

Modern Definitions:
“Rent is the difference between the actual payment to a factor and its transfer
earning”
- Hibbdon
“Economic rent may be defined as any payment to a factor of production
which is in excess of the minimum amount necessary to keep the factor in its
present occupation”
- Boulding

BCMC0009: Qualitative Aspects of

Business Economics
 Types of Rent

1. Economic Rent: Payment made for the use of land alone is called Economic
Rent.

• Example: Suppose a person is making a use of a land, then the payment made
for the use of this land to the landlord is called Economic Rent.

• Economic rent is also known as Surplus because it is free gift of nature and
does not require any cost to be paid in order to make it available to the society,
therefore, whole earnings of land are regarded as Surplus.
BCMC0009: Qualitative Aspects of
Business Economics
 Types of Rent

2. Contract Rent: Payment which is made for the use of land and the capital
invested on it is called Contract Rent.

• Example: Suppose a person is making a use of a land having a tube well

installed in it, then the payment made for the use of this land to the landlord
is called Contract Rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Types of Rent

3. Scarcity Rent: According to eminent economist Malthus, Price paid for

the use of the homogeneous/same land when its supply is limited in relation to
demand is called Scarcity Rent.

4. Differential Rent: According to Ricardo, rent arises because of difference

in the fertility of land.

BCMC0009: Qualitative Aspects of

Business Economics
 Types of Rent

• Example: In every country, there are different varieties of land, some are
more fertile and some are less fertile. When farmers are compelled to
cultivate less fertile land then owners of more fertile land get relative more
production. This more production which arises due to difference in the
fertility of land is called Differential Rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Types of Rent

5. Situation Rent: Rent also arises on account of difference in situation of

land which is called as Situation Rent.

• Example: lands which are situated nearer to towns earn more rent than the
lands situated far away from the towns.

BCMC0009: Qualitative Aspects of

Business Economics
 Differential Theory of Rent
Or
Ricardian Theory of Rent

• According to classical economist David Ricardo,

“Rent is the price paid to the landlord for
the use of the original and indestructible power of soil”

BCMC0009: Qualitative Aspects of

Business Economics
 Assumptions of the Theory

1. There is difference in the fertility of land.

2. Supply of land is fixed. It cannot be increased or decreased.

3. Land has only one use i.e., cultivation.

4. Law of diminishing returns operate in agriculture. 

5. There is perfect competition in product market. 

BCMC0009: Qualitative Aspects of

Business Economics
 Assumptions of the Theory
6. There exists marginal or no – rent land in the economy.

7. Land is cultivated in order of its fertility. First of all, the farmers cultivate
more fertile land than less fertile one.

8. Fertility of land is original and indestructible.

9. Demand for agricultural products increases with increase in population.

BCMC0009: Qualitative Aspects of

Business Economics
 Assumptions of the Theory
10. Cost of agricultural produce depends on the amount of labor spent on it.
In order to bring all kind of land under cultivation, a uniform number of
labor is employed.

BCMC0009: Qualitative Aspects of

Business Economics
 Statement of the Theory
• Ricardo’s theory of rent can be explained with the help of an example of a
newly settled country.

• In a new country, initially population is very little, so the supply of all types
of land is much more than its demand.

• Land is a free gift of nature, so the new settlers get it free of cost.

• Because of difference in fertility, they first of all bring the most fertile land,
i.e., “A” grade land under cultivation.
BCMC0009: Qualitative Aspects of
Business Economics
 Statement of the Theory
• Supply of A grade land being more than its demand, no rent will be paid for
it, despite it being the most fertile land.

• As the population of the country increases, gradually demand for land also
increases.

• People will prefer most fertile land (A) for cultivation.

• Consequently, the demand for A land will be more than its supply.

BCMC0009: Qualitative Aspects of

Business Economics
 Statement of the Theory
• People will be compelled to meet rising demand for land by bringing under
cultivation less fertile land, say “B” grade land.

• Suppose 1 hectare of A land produces 10 quintals of wheat with the help of

5 labors, and B land of the same size and with the same amount of labors
yields 5 quintals of wheat.

• Thus A land will produce 5 quintals of wheat more than B land.

BCMC0009: Qualitative Aspects of

Business Economics
 Statement of the Theory
• This differential surplus (10 qtls – 5 qtls) i.e., 5 quintals of wheat will be the
rent of A land.

• This rent arose due to the scarcity of land, people were forced to extend
their cultivation to inferior land.

• Suppose all land is equally fertile, that is, there is no difference in fertility,
yet as population goes on increasing, demand for land will also increase but
the supply of land will remain constant.

BCMC0009: Qualitative Aspects of

Business Economics
 Statement of the Theory
• Supply of land being less than its demand, those who are keen to get land,
will be willing to pay a higher prices for it.

• This higher price will be called Rent.

• Thus even if all land is homogenous and there is no difference in its fertility,
rent will arise because of scarcity of land.

• In short, rent arises due to scarcity of land is known as Scarcity rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Determination of Rent
• According to Ricardo, rent can be determined under 3 situations:

1. Extensive Cultivation: It refers to the system of cultivation wherein more

land is used to increase production.

2. Intensive Cultivation: It refers to the system of cultivation where large

units of labor and capital are used in same piece of land for increasing
production.

3. Situation Rent
BCMC0009: Qualitative Aspects of
Business Economics
 Extensive Cultivation
• Suppose that entire land of a country has been divided into 4 grades on the
basis of their fertility; namely ‘A’, ‘B’, ‘C’ & ‘D’ grade lands.

• Initially when population is not much, people cultivate the best land, i.e. ‘A’
grade land.

• Suppose by employing one unit of labor and capital, costing Rs. 100, on
this land, 10 quintals of wheat is produced.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• No rent will arise in this situation, because ‘A’ grade land is available in
abundance.

• But if population goes on increasing and the entire ‘A’ grade land has
already been brought under cultivation, then people will be forced to bring
‘B’ grade land under cultivation, which is less fertile than ‘A’ grade land.

• Suppose by employing one unit of labor and capital, costing Rs. 100, on
this land, 8 quintals of wheat is produced.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• Thus by employing homogeneous units of labor & capital on both lands, A
grade land yields more production than B grade land.

• The excess of production of A grade land over B grade land, is called rent
of A grade land.

• In this situation, no rent will accrue to B grade land as it is available in

plenty.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• If anybody wants A grade land, he will have to pay rent equivalent to the
value of 2 quintals (10-8) of wheat, because its yield in 2 quintals more than
that of B.

• If population rises further, people will be forced to bring still inferior land,
C grade land, under cultivation.

• One unit of labor and capital, costing Rs. 100, on this land, 8 quintals of
wheat is produced on C grade land.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• In this case, rent of A grade land will increase to 4 quintals (10-6) of wheat
and now even B grade land will begin to earn rent equal to 2 (8-6) quintals
of wheat.

• C grade land will get no rent now.

• If population goes on rising and so also demand for wheat, people will be
forced to bring still inferior land, D grade land, under cultivation.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• If D grade land yields 4 quintals of wheat with the same input of labor and
capital, then rent of A grade land will be 6 quintals (10-4) of wheat, B
grade land will be 4 quintals (8-4) of wheat; C grade land will be 2 quintals
(6-4) of wheat.

• The most inferior land, i.e., D grade land, will get no rent.

• It will be called marginal land or no-rent land.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• Determination of rent under extensive cultivation is made clear in table.
Land Output (in quintals) Cost of L & K Surplus over Marginal land Rent

A 10 100 10 - 4 = 6 6

B 8 100 8-4=4 4

C 6 100 6-4=2 2

D 4 100 4-4=0 0

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• Determination of rent under extensive cultivation is made clear in Fig. 1.
Y

Production
10
8

6 Re
nt
4
No Rent

0 A B C D X
Grades of Land

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
Determination of Rent by Cost Curves:

• Suppose, there exists perfect competition in the economy.

• Demand for wheat has increased to such an extent that farmers are
compelled to cultivate even the most inferior land.

• Difference between price of wheat and its average cost of production

measures economic rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Extensive Cultivation
• In Fig. 2 (iv) OP price of wheat is determined
and this price will be charged by the producers
of A, B and C grade land owners. 
• In fig. 2 (i) at OP price, rent on A-grade land is
PACB.
• In fig. 2 (ii) at OP price, rent on B grade land is
PRST whereas in fig. 2 (iii) on C-grade land at
OP price, there is no-rent because its average
cost is equal to price.
• Therefore, it is called marginal land.

BCMC0009: Qualitative Aspects of

Business Economics
 Intensive Cultivation
• Intensive cultivation refers to that type of farming in which increase in
agricultural production, is brought about only by applying more units of labour
and capital on the same piece of land.

• In other words, the area under intensive cultivation remains the same.

• Ricardo assumes that the law of diminishing returns operates in agriculture i.e.
when more and more units of labour and capital are put to use on the same piece
of land, production increases at a diminishing rate, i.e., marginal product
diminishes.
BCMC0009: Qualitative Aspects of
Business Economics
 Intensive Cultivation
• In the Figure 3 along OX-axis we represent doses of labour and capital
of equal value and along OY-axis the produce raised.

• The 1st dose of labour and capital yields output shown by the area of
rectangle No. 1, the 2nd dose brings in yield indicated by the area of
rectangle No. 2 and the 3rd dose yields output shown by rectangle No. 3.

• If the producer thinks it is just worth while to apply third dose, then the
price of yield produce will be determined by the last or marginal dose.

BCMC0009: Qualitative Aspects of

Business Economics
 Intensive Cultivation
• Measuring upwards from the marginal dose, all earlier doses
yield a surplus or rent.

• Here rent emerges entirely due to natural conditions.

• The rent will emerge in the first dose and the second dose over
the third dose which happens to be the marginal dose, as shown
in the shaded area of the diagram.

BCMC0009: Qualitative Aspects of

Business Economics
 Intensive Cultivation
• If the producer stops at the second dose then this dose will
become the last or the marginal dose and in that case rent will
arise only in the case of first dose as explained by the dotted
line in the diagram.

BCMC0009: Qualitative Aspects of

Business Economics
 Situation Rent
• Situation rent is regarded as that type of rent which arises due to difference
in the situation of land.

• The land which is situated near the market will yield more rent as compared
to land situated away from market.

• It is so because the produce of the land situated near the market can be
transported at the small expenses.

BCMC0009: Qualitative Aspects of

Business Economics
 Modern Theory of Rent
• Modern theory of rent is a modified version of Ricardian theory of rent.

• It was first of all discussed by J. S. Mill and subsequently developed by

economists like Jevons, Pareto, Marshall, Joan Robinson etc.

• According to modern theory, economic rent is a surplus which is not

peculiar( special) to land alone.

• It can be a part of the income of labor, capital and entrepreneur.

BCMC0009: Qualitative Aspects of

Business Economics
 Modern Theory of Rent
• According to modern version rent is a surplus which arises due to difference
between actual earning and transfer earning.

Rent = Actual Earning-Transfer Earning

What is Transfer Earning?

• The concept of transfer earning in economics is introduced by Prof.

Benham.

BCMC0009: Qualitative Aspects of

Business Economics
 Modern Theory of Rent

“Transfer Earning is the minimum earning which a factor must get in its
existing job otherwise it will transfer itself to another job where he/she is
likely to get this minimum earning”

BCMC0009: Qualitative Aspects of

Business Economics
 Features of 
Modern Theory of Rent
• The major features of the modern theory of rent are as under:

1. Rent can be a part of the income of all factors of production.

2. Amount of rent depends upon the difference between actual earning and
transfer earning.

3. Rent arises when supply of the factor is either perfectly inelastic or less
elastic.

BCMC0009: Qualitative Aspects of

Business Economics
 Why Rent Arises?

• According to modern theory, rent arises due to scarcity of land.

• Supply of other factors like labour, capital etc. can also be scare in relation
to demand.

• Therefore, income earned by these factors in excess of their minimum

income is called economic rent.

• Prof. Wieser divided factors of production into two parts viz.; specific
factors and non­-specific factors.
BCMC0009: Qualitative Aspects of
Business Economics
 Why Rent Arises?

Non-Specific Factors:

• These factors are those which have mobility and can be put to different
uses.

• It is only due to the reason that specific factors cannot be put to another use.

• Specificity of factors is the main cause of the emergence of rent.

• It is so because specific factors cannot be put to any other use.

BCMC0009: Qualitative Aspects of

Business Economics
 Why Rent Arises?

• So, its opportunity cost is zero.

• In other words, its transfer earning is zero.

• So its entire actual earning in the existing use is rent.

Thus, there are 2 main causes of emergence of rent:

1. When a FOP becomes specific

2. When a FOP becomes scarce or limited.

BCMC0009: Qualitative Aspects of

Business Economics
 Determination of Rent

Modern economists studied the determination of rent in two forms as:

1. Rent of Land

2. General concept of Rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
• Modern economists opined that rent arises due to scarcity of land.

• Scarcity of land means that demand for land exceeds its supply.

• Rent will be determined at a point where demand for land is equal to its
supply.

Demand for Land:

• Land has derived demand. It means that demand for land depends on the
demand for agricultural products.
BCMC0009: Qualitative Aspects of
Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
• In economics, derived demand is demand for a factor of production that
occurs as a result of the demand for another intermediate or final good.

• If demand for food grains increases, demands for land will also increase and
vice-versa.

• Moreover, demand for land is influenced by its marginal productivity. It

means as more and more land is used its MP goes on diminishing.

BCMC0009: Qualitative Aspects of

Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
Supply of Land:

• Supply of land is fixed.

• Its supply is perfectly inelastic.

• It means, increase in the price of land will not evoke any increase in its
supply.

BCMC0009: Qualitative Aspects of

Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
S
• In Fig. units of land have been measured on X-axis D1
and rent on Y-axis. E1
R1
D
• SS is the supply curve of land which is parallel to
E

Rent
R
Y-axis indicating that the supply of land remains D1
D2
fixed. E2 D
R2
• Rent will be determined at a point where the
D2
demand and supply of land are equal to each other.

Unit of Land
BCMC0009: Qualitative Aspects of
Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
S
• Initially DD is the demand curve which intersects D1

the supply curve at point E. E1

R1
D
• At this point, equilibrium rent OR is determined.
E

Rent
R D1
• Now, if the population rises which gives boost to D2

the demand for food, the demand curve shifts to R2 E2 D

D1D1 and the equilibrium will be at point E1 and

D2
the rent will rise to the extent of OR1.
O

Unit of Land
BCMC0009: Qualitative Aspects of
Business Economics
 Determination of Rent of Land or
Scarcity Theory of Rent
S
• Similarly, if the demand curve shifts to D2D2 D1

and the new equilibrium point will be E2 and R1

E1
D
the rent will fall to OR2.
E

Rent
R D1
D2

R2 E2 D

D2

Unit of Land
BCMC0009: Qualitative Aspects of
Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• According to modern economists rent is the difference between actual
earning and transfer earning.

• Rent can be a part of income of factors of production.

• But, these factors will earn rent only when their supply is less than perfectly
elastic.

BCMC0009: Qualitative Aspects of

Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• Thus, from elasticity point of view, there are three possibilities, i.e.:

1. Supply of factors of production is perfectly elastic.

2. Supply of factors of production is perfectly inelastic.

3. Supply of factors of production is less than perfectly elastic.

BCMC0009: Qualitative Aspects of

Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings

1. Supply of factors of production is perfectly elastic.

• When change in demand at existing rate is followed by corresponding

change in supply, then the supply is said to be perfectly elastic i.e. such a
factor is not scare.

• At the existing rate, any amount of that factor is available.

• Therefore, its actual earning and transfer earning will be equal.

BCMC0009: Qualitative Aspects of
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• Rent = AE – TE
• If SS of factor is perfectly elastic, it means DD=SS, factor will not
earn rent. Rent is 0
• 0=AE-TE
• TE=AE
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• In Fig 6 the supply curve of the factor of production is
represented by SS which is horizontal straight line.

• It means all factors are available at price OS.

• DD is the demand curve.

• The demand and supply curves intersect each other at point E.

• ON is the quantity of the factor used and price is OS. The

total earnings are OSEN.

BCMC0009: Qualitative Aspects of

Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• Since, transfer earnings are equal to actual earnings i.e.
OSEN, there is no surplus and, thus, no rent.

• In this way, we may conclude that if the supply is

perfectly elastic, then there exists no surplus and hence
no economic rent.

BCMC0009: Qualitative Aspects of

Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
2. Supply of factors of production is perfectly inelastic.

• Inelastic supply of a factor indicates that any increase or decrease in

demand is not followed by the supply.

• In such a case, transfer earnings will be zero and the difference between
actual earning and transfer earning will be equal to actual earning.

• Therefore, all the actual earnings will be called rent.

Rent = Actual Earning (Since Transfer Earning is zero)

BCMC0009: Qualitative Aspects of
Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• In Figure 7, SS is perfectly inelastic supply curve of land which
indicates that if price of land falls to zero even then supply remains
OS.

• It means the transfer earnings of land are zero.

• DD is the demand curve. As both the demand and supply curves

intersect each other at point E, price OP is determined.

• Since transfer earnings are zero, the total earnings (OSEP) represent
the economic rent.
BCMC0009: Qualitative Aspects of
Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• In Fig. 8 labour has been measured on X-axis and price on Y-
axis.

• SS is the somewhat elastic but not perfectly elastic supply

curve indicating that what quantity of the factor will be
available at various prices.

• The transfer earning of X1 unit of factor is AK1 while the

price is OK.

BCMC0009: Qualitative Aspects of

Business Economics
 Rent as the Difference between Actual
Earnings and Transfer Earnings
• Thus the surplus or rent is AL. In the same fashion, the other unit
earns surplus or rent.

• The transfer earnings of each factor units are less than the price.

• All units except the last unit K6 are earning profits which are more
than their transfer earnings i.e. they are earning economic rent.

• The total earnings are OK6E’ K and the transfer earnings are
OK6E’.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi-Rent

• The concept of quasi rent was introduced in economic theory by Alfred

Marshall. Marshall’s concept of quasi-rent is the extension of the Ricardian
concept of rent to the short run earnings of the capital equipment (such as
machinery, building etc.) which are in inelastic supply in the short run.

• During the short period, the earnings of specialised capital equipment

depend mainly upon the demand conditions and are thus similar to land rent
and have therefore been called rent by Marshall. 
BCMC0009: Qualitative Aspects of
Business Economics
 Quasi-Rent
• Since the capital equipment is not permanently in fixed supply like land and
instead their supply is very much elastic in the long run.

• Marshall preferred to call their earnings in the short period as Quasi rent rather
than rent.

• The quasi-rent is only temporary surplus which is enjoyed by the owner of the
capital equip­ment in the short run due to the increase in demand for it and this
will disappear in the long run due to the increase in the supply of capital
equipment in response to the increased demand.
BCMC0009: Qualitative Aspects of
Business Economics
 Quasi-Rent
• In the short run, specialized machinery has no alternative use and therefore
its supply will remain fixed in the short run.

• Thus, the transfer earnings of the capital equipment or machinery in the

short run are zero. Therefore, the whole of the earnings of the machinery in
the short run are surplus over transfer earnings and therefore represent rent.

• It may, however, be pointed out that some maintenance costs are required to
be incurred in the short run to keep the machinery in the running order.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi-Rent
• Therefore, more precisely, the quasi rent may be defined as the short run
earnings of a machine minus the short run cost of keeping it in running
order.

• There is every reason to believe that quasi rents will be generally earned in
the short run by the capital equipment like machinery, building etc.

• This is because, however having the competition be­tween entrepreneurs

may be, the supply of capital equipment cannot be increased short-run.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi-Rent

Quasi Rent = (total earning of the machine in the short run) – (short run
cost of maintenance of that machine to keep it in running order)

• Quasi word is derived from Latin word which means “as if”

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi-Rent
• Consequently, when very high earnings are being made from capital equipment
they will not be competed away in the short run.

• But in the long run the position regarding the supply of capital equipment (e.g.,
machines) is quite different.

• Capital equipment’s are man-made instruments of pro­duction and therefore their

supply can be increased in the long run to meet the increased demand for them.

• Thus, as a result of the increase in the supply of machines in the long run their
excessive earnings will be competed/taken away.
BCMC0009: Qualitative Aspects of
Business Economics
 Quasi-Rent
• In the long run, therefore, the competitive equilibrium is reached when the
earnings from the capital equipment are just sufficient to maintain them in
running order and provide only normal profits to entrepreneur.

• Thus in the long run no surplus over cost of production is earned by the
machines.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi-Rent
• Therefore, quasi rent will disappear in the long-run competi­tive equilibrium.

• Professors Stonier and Hague rightly remark, “The supply of machines is

fixed in the short run whether they are paid much money or little so they earn
a kind of rent. In the long run this rent disappears- it is not a true rent, but
only an ephemeral reward—a quasi-rent”.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• Production of a good is possible when a fixed factor is combined with some
variable factors.

• The amount of variable factors used depends upon the level of output produced,
while the quantity of the fixed factor remains unchanged during the short period.

• The variable costs must be recovered in the short-run otherwise the produc­-tion
would be stopped. (Price = Average Variable Cost) – Shut-down Point

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• Therefore, quasi-rent has also been defined as the excess of total revenue in
the short run over and above the total variable costs.

• Thus,

Quasi Rent = Total Revenue Earned -Total Variable Costs

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• Since in long run, all costs are variable and, in long run competi­tive
equilibrium, total receipts are equal to total costs (including nor­mal profits
to the entrepreneur), no excess earnings over and above the costs will
accrue to the machines and therefore no quasi rent will be earned by the
machines.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• The earnings of quasi rent in the short run and
its disappearance in the long run is illustrated in
Fig. 34.8 wherein, as usual, output is measured
on the X-axis and price and cost are measured
on the Y-axis.

• ATC and AVC represent the average total cost

and average variable cost curves respectively in
the short run.
BCMC0009: Qualitative Aspects of
Business Economics
 Quasi Rent as Surplus over Variable
Costs
• It should be noted that the average variable
cost, AVC includes the cost incurred per unit
of output on the variable factors such as
labour, raw materials etc. as well as the cost
per unit of output for keeping the machinery in
the working order during the short period. 

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• Now suppose that the demand for the product is such
that the price OP is determined.

• With price of the product OP the price line faced by

an individual entrepreneur is PL which represents
the marginal revenue as well as the average revenue.

• With price line PL, the entrepreneur is in equilibrium

at point Q and is producing OM level of output.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• It will be seen from the figure that the total revenue earned is
OMQP, while total variable costs incurred is OMEF.

• The area FEQP represents the surplus of total revenue

earned over the total variable costs (FEQP = OMPQ –
OMEF).

• Thus FEQP is quasi rent, that is, the short-run earnings of

the machinery.

BCMC0009: Qualitative Aspects of

Business Economics
 Quasi Rent as Surplus over Variable
Costs
• If now the demand for the product declines so that the
price for the product falls to OP’.

• With price OP’, the price line is P’L’ and equilibrium of

the entrepreneur is at point R with output OM’.

• Now, the total revenue earned is OM’RP’ and the total

variable cost is OM’GH.

• Thus the quasi rent earned by the machinery is now

HGRP’ = (OM’R-P’ – OM’GH).
BCMC0009: Qualitative Aspects of
Business Economics
 Quasi Rent as Surplus over Variable
Costs
• If the demand for the product further declines and the
price falls to OP”, the price line confronting the
entrepreneur will be P”L” and he will be in
equilibrium position at point S – the minimum point
of the curve AVC.

• At point S, the total revenue earned is just equal to the

total variable costs and quasi rent earned by the
machinery has fallen to zero. 
BCMC0009: Qualitative Aspects of
Business Economics