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 somebodys 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 +

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.

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.

Output / return

20

20000-6000=

14000-6000=

10000-6000=

6000-6000=

14000

8000

4000

No rent

Rent
Surplus

14

Intra-Marginal Land
Rent
Marginal Land
Surplus (No Rent Land)

10

Rent
Surplus

Input cost
A

Types of Land

Ricardian Theory of Rent

Land A
MC
Rent
AC

A
P=AR=MR

P
R

Produce

Ricardian Theory of Rent

Land B
MC
Rent
AC

B
P=AR=MR

P
R

Produce

Ricardian Theory of Rent

Land C
MC
rent

AC

C
P=AR=MR

P
R

Produce

Ricardian Theory of Rent

Land D
MC
Rent

AC

D
P=AR=MR

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.

Ricardian Theory: Criticisms

The definition of rent has been criticised,

payment made for the use of original & indestructible

In the present atomic era, one

cannot 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.
power of soil.

Ricardian Theory: Criticisms

If no-rent land exists, it would be difficult

to measure differential rent of intramarginal 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 pricedetermining, 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 doesnt 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.

Whats similar between

Ricardo and Marshall ?
Like differential rent, scarcity
rent is the producers 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

Scarcity Rent

R3

D3

R2

D2
R1

D1
O

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

Modern Theory of Rent

Quasi Rent

AC
MC

Price/Cost

E3

P3
E2

P2
P1

E1
E

Q Q1 Q2 Q3

D=AR3=MR3
AVC

D=AR2=MR2
D=AR1=MR1
D=AR=MR

Quantity