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
somebody’s 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= 14000-6000= 10000-6000= 6000-6000=
14000 8000 4000 No rent
20 Rent Intra-Marginal Land
Surplus
14
Rent Marginal Land
Output / return

Surplus (No Rent Land)

10
Rent
Surplus
6

Input cost

A B C D
Types of Land
Ricardian Theory of Rent
 Land A
MC
Rent

AC

P P=AR=MR

R S

Q Produce
Ricardian Theory of Rent
 Land B
MC
Rent
AC

P P=AR=MR

R S

Q Produce
Ricardian Theory of Rent
 Land C
MC
rent
AC

P P=AR=MR

R S

Q Produce
Ricardian Theory of Rent
 Land D
MC
AC
Rent

P P=AR=MR

Q 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 price-
determining.
 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
In the present atomic era, one cannot
of soil’.
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 price-
determined.
 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 doesn’t 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.
 What’s similar between
Ricardo and Marshall ?
 Like differential rent, scarcity rent is the
producer’s 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
Rent
S
 Scarcity Rent
R3

D3
R2

D2
R1

D1

O Q Quantity of Land
 Modern Theory of Rent
 Rent is generalized surplus earned by all
factors.
 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.
 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.
 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.
 Modern Theory of Rent
 Quasi Rent AC

Price/Cost MC

E3
P3
D=AR3=MR3
P2 E2 AVC
D=AR2=MR2

P1 E1
D=AR1=MR1

E
P D=AR=MR

O Q Q1 Q2 Q3
Quantity