Rent

Production is the result of the efforts of four factors

of production. The price that the owner of land gets
for allowing its use is generally termed as rent.
In general, rent is defined as a payment made for
the use of a material asset for a specified period of
time.
But in economics by rent we mean the price paid
for the use of land only other kind of usage of a
material asset is called Contract Rent and not Rent.
Therefore, to be explicit the surplus earning of a
factor of production whose supply is less than
perfectly elastic is called rent in economics.

Definition of rent
Rent definition
Ricardians view

Marshalls view

Modern concept view

Before defining rent according to Ricardo lets first

understand what do we mean by Rent.
Land means all those gifts of nature in their original form
which can neither reproduce by man or destroyed by him.
Simply speaking land does not only mean the upper layer
of the soil but also all that lies above or below the surface
of earth. So forest resources minerals, fish or water are all
included in the category of land.

Definition of rent according to

Ricardians view

According to him rent is defined as the price paid for the use of
original and indestructible powers of soil.

To make the meaning of rent more understandable he has further

divided rent into two : Gross rent and Economic rent

Gross rent: Rent paid under contract i.e. beside the price paid for
the use of land, which includes interest on capital which is invested
on the land e.g. tanks, wells and wages for the supervision of land

Economic rent: is the only price paid for the services of land.

Ricardo was of the opinion that only land earns rent because its
supply is perfectly inelastic. Its supply cannot be changed and it is
also a free gift of nature

Definition of rent according to

Marshalls view

Marshall defined rent as the income derived from

the ownership of land and other free gifts of nature.
Marshall extended the term rent to include in it also
the payment to man made equipments who supply
is inelastic like that of land in the short run. He
called it Quasi Rent
According to Marshall land is a free gift of nature
only from the society point of view a s whole. But
when it comes to particular person firm or industry
it is available at price and supply is not perfectly
inelastic

Definition of rent according to

modern concept

According to it rent is defined as a

surplus. The income which a factor earns
over and above its minimum earning is a
surplus called Rent.
This minimum earning is also called
transfer earning
Transfer earning: It is the minimum
payment which a factor must earn in order
to stay in the present use.

Determination of rent
There are manly two theories given by the
economist in order to determine rent.

Rent Determination
Ricardian theory of rent

Modern theory of rent

Ricardian theory of rent

a)

b)

Ricardio said that rent is a surplus which accrues to

the owners of land by reason of relative advantage
of fertility or situation or both which a particular plot
of land enjoys over less productive land.
Thus, Ricardo defined rent as Rent is that portion of
the produce of the earth which is paid to the land
lords for the use of original and indestructible power
of the soil.
Thus, rent can arise due to two reasons:
Difference in the productivity of various pieces of
land
Situational differences

Assumption of the theory

Fixed supply of land

Original powers
Indestructible powers
Cultivation in order of fertility
Law of diminishing returns
Difference in fertility
Free gift
Perfect competition
Long run
Marginal land: which is just covering its cost only i.e.
income from it is equal to its cost
Different situations

Explanation of the theory

a)
b)

According to this theory rent arises due to niggardliness of nature

and two facts leads to niggardliness
Land is fixed in supply
It differs in fertility

Ricardo considered as a surplus which arises due to the differences in

fertility and situation. He took the assumption of the marginal land
for explaining the origin of rent margin rent is also called no rent
land. The land which has higher productivity than this marginal
land is called Intra marginal land And according to Ricardo, rent is
a surplus which is the difference between marginal and intramarginal lands. Hence all the plots of land which produce more
than the marginal land earn rent. So we can say that Ricardo
believed rent to be a differential surplus earned by intra marginal
lands over the earnings of marginal lands

There are two farming techniques : Intensive cultivation and

Extensive cultivation. Rent arises in both techniques.

Techniques

Farming techniques
Extensive cultivation

Intensive cultivation

Origin of rent under Extensive

Cultivation

Extensive cultivation is the type of

farming under which production is
increased by using more land.

Grade of land
A
B
C
D

Production
(in tons)
25
20
15
10

Surplus i.e.
Rent in tons
25-10=15
20-10=10
15-10=5
10-10=0

PRODUCTION (IN TONS)

RENT ON LAND A
25
RENT ON LAND B
20

RENT ON LAND C

15

NO RENT LAND

10
5

D
GRADES OF LAND

Hence rent is the surplus between

the production of the marginal and
intra marginal lands

Origin of rent under Intensive

Cultivation

It is second type of farming. Here on the same piece

of land, more units of labor and capital are employed
to increase the production.
Hence minor production will go on diminishing. Here
marginal product refers to the addition made to the
total production by using one more unit of labor and
capital, other factor units remaining constant.
The under given table explains that the first second
and third units on rent not due to the difference of
the fertility of land but due to diminishing returns on
the same piece of land

Units of Labor
and Capital

Marginal
Production
(in tons)

Surplus
Production or
Rent (in tons)

1st

25

25-10=15

2nd

20

20-10=10

3rd

15

15-10=5

4th

10

10-10=0

PRODUCTION (IN TONS)

RENT OF UNIT 1st

25
RENT OF UNIT 2nd
20

RENT OF UNIT 3rd

15

NO RENT UNIT OR
MARGINAL UNIT

10
5

1st

2nd

3rd

4th

UNITS OF LABOUR AND CAPITAL

Thus ricardo rent was a surplus which

the intra marginal lands and units of
labor and capital earn over and
above the production of marginal
units or marginal lands

Criticism of Ricardo theory

No original and indestructible powers

Historically wrong
Neglect of scarcity rent
Wrong assumption of perfect competition.
Wrong assumption of no rent land
Every land has fertility
Rent element in all factors
Rent enters into price
It fails to determine rent
Wrong idea of the application of the law of
diminishing returns

Conclusion of the theory

Though this theory fails to determine

rent but it occupies an important place
in economic theory the nature and
origin of rent stands as the singular
contribution to understanding of the
determination of factors shares. All the
other theory is simply a modification or
improved version of their theory

Modern theory of rent is an improvement over

the Ricardian theory is that it is not only land
which can earn rent but other factors of
production i.e. labor, capital, organisation
and entrepreneur are also entitled to rent.
Land is scare. So it earns scarcity rent. Lands
differ in fertility. So they earn differential rents
The Ricardian theory was failing to determine
how rent is determined but their question was
answered by modern theory.
To determine rent the modern economics
have developed & supply theory for the
purpose.

The theory is also known as Scarcity

Theory of Rent the theory explains
that rent doesnt arise due to fertility
differences of land alone but due to
more demand in relation to supply of
all factors. The more the scarcity of
land and the other factors, the higher
will be the size of rent earned. Hence
the forces of demand and supply
together determine rent

Demand Side

The demand for land is indirect or derived.

In fact, land is demanded for it produces
something. The higher is the demand for the
goods produced on land, the demand for
land itself will be more therefore the price of
land (rent) will be more and therefore the
price of land (rent) will be higher. Marginal
productivity of land determines the demand
for it. As we go on investing more and more
on the same land, its marginal productivity
of land equals its price which is rent.

Supply Side

The supply of land cant be altered for the society

as a whole.
We know that land has alternative uses i.e. it can
be used in several ways. So, for a particular
industry or firm or individual, the supply of land can
be changed, i.e. it is elastic. Any individual can get
more land by bidding up its price. Hence the supply
curve of the land for an individual firm or industry is
having an upward slope.
Rent is determined at the point where demand for
and supply of land intersect each other. This is
shown through a diagram given below.

Modern theory is also applicable

when land differs in fertility
The different-fertility lands will have
separate demand curves for them.
The price for more fertile and better
situated land will be higher than
those of the others. And their
equilibrium

RENT

D1
S

D
R1

E1

D2

R2

D1

E2
D
S
D2

Q2

Q3

DEMAND AND
SUPPLY OF LAND

Modern theory is also applicable when

lands differ in fertility

The different-fertility lands will have

separate demands curves for them. The
price of more fertile and better situated
land will be higher than those of the
others. And their equilibrium rents will
also be higher than those of the less
fertile and relatively less favorably
situated lands.

Rent as a surplus

Modern economists agree to the idea of

the surplus being rent as advocated by
Ricardo. But they differ on the point that
rent is earned only by land. Modern
economist are the opinion that other
factors of production than land can also
earn rent. The features of in-elasticity of
supply is also found among other factors
of production in the short run.

Rent and transfer earnings

Rent =Actual earning Transfer earning
Where:
The income which a factor actually gets from its
present work or job is called its actual earning
Transfer earning refers to the price which a
factor unit must get in its present use in order
to stay in its present employment.

Specific and non-specific

factors

Specific factors are those which can be put

only to one use. These have no alternative
use in other words, they have no next
based use. So, their transfer earning is
zero. And the whole of their actual earning
is rent. On the other hand, non-specific
factors are those which can be put to more
than one uses. They have alternative uses.
Hence the share of rent is specific factors
is more than that in the non-specific ones.

The supply of land as a factor of

production can be of three types:
Perfectly Inelastic Supply
Perfectly Elastic Supply
Elastic Supply

Perfectly Inelastic Supply

From the society's view point, land

supply cannot be either increased or
decreased. It is a given. It has no
alternative use. So, it has no transfer
earning. The whole of its actual
earning is rent.

PRICE

D1

E1

P1

D1
D

ACTUAL EARNING
=RENT

DEMAND AND SUPPLY OF LAND

Perfectly Elastic Supply

It means that we can get land as

much as we desire at a given price of
it. It is possible only when the
transfer earning of the all units of
land is the same. In this situation,
transfer earning (TE) will be equal
actual earning (AE). So no rent will be
earned.

PRICE AND RENT

D1

E1

E
P

NO RENT EARNING
D1

M1
DEMAND AND

Elastic Supply

But, actually for a particular firm or

industry, supply of land is neither
perfectly inelastic nor perfectly elastic. It
is in between these two. Hence supply of
land is less elastic. In this situation,
actual earning will be more than its
transfer earning. So rent will be earned
equal to the difference between these
two.

PRICE

D1
D
S1
E1

P1
RENT

P
EARNING
S

D1
D
O

M1

DEMAND AND SUPPLY OF LAND

Modern Theory as an
Improvement Over Ricardian
Theory of Rent

Amplification of Ricardian theory

Modification of the Ricardian Theory
Rent and Price

RENT VERSUSES QUASIRENT

If we study the concepts of rent and

Quasi-rent, we find that there are a
few similarities, and some
differences between the two. We can
discuss both of these here.

Similarities
a)

b)

c)

d)

Rent and Quasi-rent both are surplus or

excess earnings.
Both arise due to rise in demand for land
and man-made factors.
Rent and Quasi-rent are similar also
because both accrue due to the fixed or
inelastic supply of factors.
Rent and Quasi-rent are both measured
by the differences between the actual
earning and transfer earning of a factor

Differences
Despite the similarities given above, rent and
Quasi-rent differ. The following points
show it :
i.
Rent is earned by the free gifts of nature
such as land. But Quasi-rent is the excess
income earn by the man-made factors.
ii.
Rent is earned both in short run and long
run. While Quasi-rent occurs only in short
run because in the long run, man-made
factors have their perfectly elastic supply.

iii.

iv.

v.

Rent is permanent earning while

Quasi-rent is transitory. In other
words, Quasi-rent is not a cost in the
short period.
Rent is never zero. But Quasi-rent
becomes zero when price is equal to
average variable costs.
Rent is the difference between total
earnings and total costs. But Quasirent is the difference between total
earnings and variable costs.

Rent is an un earned income while

Quasi-rent is a necessary payment
for the firm to produce the output.
Hence rent and Quasi-rent differ
mainly in the duration of the time
period. The former belongs to the
short run as well as to the long run.
While the later arises only in the
short run.
vi.