BAIIISemEconomics Prepared ByDr Suneyna Department of Economics Introduction

BAI(II-Sem)Economics Prepared By-Dr. Suneyna Department of Economics

Introduction In simple words, ‘ rent’ is used as a part of the produce which is paid to the owner of land for the use of his goods and services. But, in economics, the term rent is applied only for payment made for factor of production which are in imperfectly elastic supply with land as the main example.

Definition of Rent “Rent is that portion of the produce of earth which is paid to landlord for the use of original and indestructible powers of the soil. ” –Ricardo “Rent is the price paid for the use of land. ” –Prof. Carver

Types of Rent The main types of rent are as under: 1. Economic Rent Economic rent refers to the payment made for the use of land alone. Definition of Economic Rent: The definitions of economic rent can be grouped into two parts as: • Classical Definitions “Economic rent is the payment for the use of 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

• Modern Definitions “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 “Rent is the difference between actual payment to a factor and its supply price or transfer earnings. ” – Hibdon

2. Gross Rent Gross rent is the rent which is paid for the services of land the capital invested on it. Gross rent consists of: (1) Economic rent. It refers to payment made for the use of land. (2) Interest on capital invested for improvement of land. (3) Reward for risk taken by landlord in investing his capital.

3. Scarcity Rent Scarcity rent refers to the price paid for the use of the homogeneous land when its supply is limited in relation to demand. If all land is homogeneous but demand for land exceeds its supply, the entire land will earn economic rent by virtue of its scarcity. In this way, rent will arise when supply of land is inelastic.

4. Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo.

5. Contract Rent Contract rent refers to that rent which is agreed upon between the landowner and the user of the land. On the basis of some contract, which may be verbal or written, contract rent may be more or less than the economic rent.

Quasi Rent The concept of quasi-rent was given by Alfred Marshall. He defined quasi rent as surplus earnings generated by the factors of production, except land. The earnings from machines and instruments are termed as quasi-rent. The quasi-rent refers to the income produced when the demand for products increases suddenly. Quasi rent can also be expressed in terms of revenue, which is as follows: Quasi-rent = Total revenue – total variable cost In the long run, all the costs are considered as variable cost. In long-run, the equilibrium can be attained when total revenue is equal to total costs. In such a case, there is no quasi-rent.

Difference between Rent and Quasi-Rent • Rent arises from land other free gifts of nature whereas the quasi-rent arises from the man-made capital equipment. • Rent arises both in short and long-period whereas the quasi-rent arises only in the short-period.

Theories of Rent 1. Ricardian Theory of Rent or Classical Theory of Rent 2. Modern Theory of Rent

1. Ricardian Theory of Rent or Classical Theory of Rent According to Ricardo, rent is that portion of the produce of the earth, which is paid to the landlord for the original and indestructible powers of the soil. It is a surplus enjoyed by the super marginal land over the marginal land arising due to the operation of the law of diminishing returns.

Determination of Rent

Extensive Cultivation

Intensive Cultivation

2. Modern Theory of Rent Modern theory of rent does not confine itself to the reward of only land as a factor of production. Rent in modern sense can arise in respect of any factor of production, and not merely land. Rent is a surplus. In the sense of surplus, rent is a payment in excess of transfer earnings. Transfer earnings mean the amount of money which any particular unit could earn in its next best alternative use.

(i)Rent when Supply of Factor is Perfectly Inelastic

(ii)Rent when Supply of Factor is Perfectly Elastic

(iii)Rent when Supply of Factor is Less Than Perfectly Elastic

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