ASSIGNMENT 3

13.01.23

 Definition of Economic Rent

Economic rent refers to extra money that a person makes over the amount they expect. It is
the extra payment made over and above the amount expected by its owner. It is the
positive difference between the actual payment received for the work you have done or the
money a piece of land has made for you and the payment amount that was expected in the
first place.

Economic rent should not be mistaken for the more commonly used 'rent' term, which
simply refers to payments made for using an asset or property. Economic rent can be
thought of as more of a surplus amount.

 How does “Economic Rent” occur?

Economic rent occurs in instances where there are scarcities for a service or when a
particular person has a special timing or need for a service.

For example:

1. If a company hires a surveyor for surveying a construction site where the project
needs to start on an urgent basis. Due to lack of surveyors in the area, the company
pays $18 an hour to get started as soon as possible whereas, the nominal cost of
hiring a surveyor was $15 an hour. The $3 difference is the economic rent received
by the employee.
2.
 Economic Rent Calculation
Economic rent is the difference between marginal product and opportunity cost. The
relationship can be summarized with the following equation:

Economic Rent = Marginal Product – Opportunity Cost

In which,
Marginal Product - It is the cost to produce one unit of production.
Opportunity Cost - Opportunity cost is the alternative for what you could have done
with that money instead. It is a way to measure how wisely you are spending your
money and resources.