Concept of Rent .pptx

details about rent

1. Concept of Rent

2. Definition of Rent 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. 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 income derived from the ownership of land and other free gifts of Nature. He called it Quasi Rent.

3. Economic rent is also termed as surplus as it is received by landlord without any effort. Prof. Bounding termed it as Economic Surplus. Definition of Economic Rent: 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

4. 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

5. Types of Rent: Economic Rent: Economic rent refers to the payment made for the use of land alone. But in economics the term rent is used in the sense of economic rent. In the words of Ricardo and other classical economists, economic rent refers to the payment for the use of land alone It is also called Economic Surplus because it emerges without any effort on the part of landlord. Prof. Boulding termed it “Economic Surplus”.

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

7. 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. Prof. Ricardo opined that land was beneficial but it was also scarce. Productivity of land was indicative of the generosity of nature but its total supply remaining more or less fixed symbolized niggardliness of nature.

8. Differential Rent: Differential rent refers to the rent which arises due to the differences in the fertility of land. In every country, there exists a variety of land. Some lands are more fertile and some are less fertile. When the farmer’s are compelled to cultivate less fertile land the owners of more fertile land get relatively more production. This surplus which arises due to difference in fertility of land is called the differential rent. This type of rent arises under extensive cultivation. According to Ricardo, “In order to increase production on same type of land, more units of labour and capital are employed.”

9. 5. Contract Rent: Contract rent refers to that rent which i s 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.

10. Wages A wage is monetary compensation (or remuneration, personnel expenses, labor) paid by an employer to an employee in exchange for work done. Payment may be calculated as a fixed amount for each task completed (a task wage or piece rate), or at an hourly or daily rate (wage labour ), or based on an easily measured quantity of work done.

11. Minimum wages Minimum wages have been defined as the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.

12. Theories of Wage The Subsistence theory of wages , advanced by David Ricardo and other classical economists, was based on the population theory of Thomas Malthus. It held that the market price of labour would always tend toward the minimum required for subsistence. If the supply of labour increased, wages would fall, eventually causing a decrease in the labour supply. If the wage rose above the subsistence level, population would increase until the larger labour force would again force wages down.

13. Wage Fund Theory The wage-fund theory held that wages depended on the relative amounts of capital available for the payment of workers and the size of the labour force. Wages increase only with an increase in capital or a decrease in the number of workers. Although the size of the wage fund could change over time, at any given moment it was fixed. Thus, legislation to raise wages would be unsuccessful, since there was only a fixed fund to draw on.

14. Karl Marx, an advocate of the labour theory of value, believed that wages were held at the subsistence level by the existence of a large number of unemployed.

15. R esidual-Claimant theory of wages The residual-claimant theory of wages, originated by the American economist Francis A. Walker, held that wages were the remainder of total industrial revenue after rent, interest, and profit (which were independently determined) were deducted.

16. M arginal productivity theory The Marginal productivity theory of wages, formulated in the late 19th century, holds that employers will hire workers of a particular type until the addition to total output made by the last, or marginal, worker to be hired equals the cost of hiring one more worker. The wage rate will equal the value of the marginal product of the last-hired worker.

17. Concept of Interest Interest is the price you pay to borrow money or the cost you charge to lend money. Interest is most often reflected as an annual percentage of the amount of a loan. This percentage is known as the interest rate on the loan.

18. Theories of Interest Abstinence Theory or Waiting Theory: This theory was propounded by N.W.Senior . To him, interest is the reward for abstaining from the immediate consumption of wealth. According to Senior, capital is the result of saving. But saving involves “abstinence” or “sacrifice”. It is possible to save only if one abstains from present consumption. Such abstinence from present consumption involves some suffering. Hence, it is necessary to reward the saver (capitalist) to compensate for the sacrifice he has to undergo by abstaining from present consumption. Therefore, interest is the reward or compensation paid to the saver (capitalist) for his “abstinence” or “sacrifice”.

19. Abstinence Theory or Waiting Theory Criticism: According to this theory, saving involves suffering. But savings may not always involve suffering to some rich people. Rich people have money for which they do not get interest. Hoarding of money is to quench the thirst for liquidity.  

20. Loanable Funds Theory/ The Neo Classical Theory The Loanable Funds Theory, also known as the “Neo–Classical Theory”, was developed by Swedish economists like Wicksell , Bertil Ohlin, Viner , Gunnar Myrdal and others. According to this theory, interest is the price paid for the use of loanable funds. The rate of interest is determined by the equilibrium between demand for and supply of loanable funds in the credit market.  

21. Profit Profit , in business usage, the excess of total revenue over total cost during a specific period of time. In economics, profit is the excess over the returns to capital, land, and labour (interest, rent, and wages). To the economist, much of what is classified in business usage as profit consists of the implicit wages of manager-owners, the implicit rent on land owned by the firm, and the implicit interest on the capital invested by the firm’s owners.

22. Walker’s Theory An American economist, Prof F. A. Walker propounded the theory of profit, known as rent theory of profit. According to him “as rent is the difference between least and most fertile land similarly, profit is the difference between earnings of the least and most efficient entrepreneurs.”

23. Clark’s Dynamic Theory Clark’s dynamic theory was introduced by an American economist, J.B. Clark. According to him, profit does not arise in a static economy, but arise in a dynamic economy. A static economy is characterized as the one where the size of population, the amount of capital, nature of human wants, the methods of production remain the same and there is no risk and uncertainty. Therefore, according to Clark, only normal profits are earned in the static economy.

24. Clark’s Dynamic Theory A dynamic economy is characterized by increase in population, increase in capital, multiplication of consumer wants, advancement in production techniques, and changes in the form of business organizations. The dynamic world offers opportunities to entrepreneurs to make pure profits.

25. Hawley’s Risk Theory Hawley’s Risk Theory: The risk theory of profit was given by F. B. Hawley in 1893. According to Hawley, “profit is the reward of risk taking in a business. During the conduct of any business activity, all other factors of production i.e. land, labor, capital have guaranteed incomes from the entrepreneur. They are least concerned whether the entrepreneur makes the profit or undergoes losses.”