Modern theory of Rent and Quasi-rent

The modern theory of rent is an amplified and modified version of the Ricardian theory of Rent. It was first of all discussed by J.S. Mill and after that developed by economists like Jevons, Pareto, Marshall, Joan Robinson etc.

According to modern theory, economic rent is a surplus which is not peculiar to land alone. It can be a part of the income of labour, capital, entrepreneur.

According to the modern version, rent is a surplus which arises due to the difference between actual earning and transfer earning.

1. RENT
•Classification
•Modern theory of rent
•Quasi-rent
By
SaptarsheeMandal
BA SEM IV
A brief
Discussion

2. Rent
/rɛnt/
noun
noun:rent; plural noun:rents
verb:rent
“Rentisthatportionoftheproduceofearthwhichispaidtolandlordforthe
useoforiginalandindestructiblepowersofthesoil.”–Ricardo
“Rentistheincomederivedfromtheownershipoflandandotherfreegiftsof
Nature.”-Marshall
“Rentisthedifferencebetweenactualpaymenttoafactoranditssupplyprice
ortransferearnings.”–Hibdon

3. GROSS RENT
QUASI-RENT
SITUATIONAL RENT
CONTRACTUAL RENT
DIFFERENTIAL RENT
ECONOMIC RENT
RENT
SCARCITY RENT
CLASSIFICATION OF RENT

4. MODERN THEORY OF RENT
Modern Theory of Rent
ModerntheoryofrentisanamplifiedandmodifiedversionofRicardiantheoryof
Rent.ItwasfirstofalldiscussedbyJ.S.Millandafterthatdevelopedbyeconomistslike
Jevons,Pareto,Marshall,JoanRobinsonetc.
Accordingtomoderntheory,economicrentisasurpluswhichisnotpeculiartoland
alone.Itcanbeapartofincomeoflabour,capital,entrepreneur.
Accordingtomodernversionrentisasurpluswhicharisesduetodifferencebetween
actualearningandtransferearning.

5. MODERN THEORY OF RENT
ACTUAL EARNING: Actual earning is the earning from use of factors of production.
TRANSFER EARNING: Transfer earning is the earning from the next best alternative
use of the factors of production. -Benham
Price which is required to retain 1 unit of land, labour, capital. -Robinson
RENT = ACTUAL EARNING –TRANSFER EARNING

6. MODERN THEORY OF RENT
Features:
•Rent is a part of all the factor inputs.
•Rent = AE-TE
•Supply should be perfectly inelastic or less elastic
s s
i) Perfectly Inelastic ii) Less elastic

7. MODERN THEORY OF RENT
Scarcity theory of Rent
ModernEconomistsstatedthatrentarisesduetoscarcityofland.Scarcityof
landmeansthatdemandforlandexceedsitssupply.Rentwillbedetermined
atapointwheredemandforlandisequaltoitssupply.
Demandoflanddependson-
•DerivedDemand
•DiminishingMarginalProductivityofLand
Priceoflandisnotdeterminedbysupplyoflandbutbydemandoflandas
landisfixed.

8. MODERN THEORY OF RENT
Rent as a difference between AE and TE
i) Supply of factors of production is perfectly elastic:
S
D2D1
e = ∞
Q Q2o
NO RENT
E
Thesupplycurveofthefactorof
productionisrepresentedbySSwhichis
horizontalstraightline.Itmeansall
factorsareavailableatpriceOS.DDis
thedemandcurve.
Thedemandandsupplycurvesintersect
eachotheratpointE.OQisthequantity
ofthefactorusedandpriceisOS.The
totalearningsareOSEQ.
Since,transferearningsareequaltoactualearningsi.e.OSEQ,
thereisnosurplusand,thus,norent.Ifthisfirmdoesnotpay
theprice,thefactorunitswillbeshiftedtootherusesandearn
thereasmuch,becausepresentearningsequatesthetransfer
earnings.

9. MODERN THEORY OF RENT
Rent as a difference between AE and TE
ii) Supply of factors of production is perfectly inelastic:
Q
P
P2
O
D1
D2
E
RENT
SSisperfectlyinelasticsupplycurveoflandwhichindicatesthatif
priceoflandfallstozeroeventhensupplyremainsOQ.Itmeans
thetransferearningsoflandarezero.
D1isthedemandcurve.Asboththedemandandsupplycurves
intersecteachotheratpointE,priceOPisdetermined.Since
transferearningsarezero,thetotalearnings(OPEQ)representthe
economicrent.
Inelasticsupplyofafactorindicatesthatany
increaseordecreaseindemandisnotfollowed
bythesupply.Insuchacase,transferearnings
willbezeroandthedifferencebetweenactual
earningandtransferearningwillbeequalto
actualearning.Therefore,alltheactual
earningswillbecalledrent.

10. MODERN THEORY OF RENT
Rent as a difference between AE and TE
iii) Supply of factors of production is less elastic:
Demand for
Labour
Actual
Earning
Transfer
Earning
Rent
20 20 20 0
35 25 20 5
40 30 20 10
Theabovetableshowsthatwhendemandforlaboureris20,theirtransfer
earningandactualearningsareequal.Therefore,Rs.20istheminimumwage
ratebelowwhichtherewillbenosupplyoflabour.Now,ifdemandforlabourer
increasesto35butsupplydoesnotincreasetothesameratio,wageratewill
rise.Asaresultactualearningoflabourerwillriseto25whiletransferearning
willbeRs.20perlabourer.Similarly,ifthedemandforlabourerincreasesto40
butsupplydoesnotrise,wagerateoflabourerwillfurtherrise.Actualearning
willgouptoRs.30perlabourer.Thus,everylabourerwillearnrentequaltoRs.
10.
SOURCE: ECONOMICDISCUSSION.NET

11. MODERN THEORY OF RENT
Rent as a difference between AE and TE
iii) Supply of factors of production is less elastic:
O
U
Q
P
D
S
E
Lessthanperfectlyelasticsupplymeans
thatthetransferearningsofallthefactor
unitsarenotequal.
Thetransferearningsofeachfactorunits
arelessthantheprice.
Supplycurveisthesomewhatelasticbut
notperfectlyelasticsupplycurveindicating
thatwhatquantityofthefactorwillbe
availableatvariousprices.
RENT = Actual Earning –Transfer Earning
= OPEQ –OUEQ
= UPE
A
L
ThetransferearningofX
1unitoffactorisAQ
1whilethepriceisOK.
ThusthesurplusorrentisAL.Inthesamefashion,theotherunit
earnssurplusorrent.
Q1Q2

12. Theconceptofquasi-rentwasgivenbyAlfredMarshall.Hedefinedquasi-rentas
surplusearningsgeneratedbythefactorsofproduction,exceptland.
Thequasi-rentreferstotheincomeproducedwhenthedemandforproducts
increasessuddenly.
Itisusedforashort-periodoftime.Ineconomicrent,thesupplyoffactorisfixed,
suchasland.However,inquasi-rentthesupplyoffactoristemporaryandcanbe
increasedordecreasedaftersometime,suchasmachine.
Quasi-rent in terms of revenue:
Quasi-rent = Total revenue –Total variable cost
Inthelongrun,allthecostsareconsideredasvariablecost.Inlong-run,the
equilibriumcanbeattainedwhentotalrevenueisequaltototalcosts.Insucha
case,thereisnoquasi-rent.
QUASI-RENT

13. SSrepresentstheinelasticsupplycurve.
Thedemand(DD)andsupply(SS)curve
intersectsatpointE.AtpointE,theprice
isequaltoOPandquantityofequipment
isOS.Intheshortrun,theincreased
demand(D’D’)reachestothepricelevel
ofOP’withtheconstantsupplyofOS.
Asthenumberofequipmentisconstantinshort-run,therefore,
thetransferearningsarezeroandquasi-rentisequaltototal
earningsfromtheequipment.However,inlong-run,thesupplyof
equipment(PL)isperfectlyelastic.Therefore,anynumberof
equipmentcanbesuppliedatOP.Now,thesupplyreachestoOM
andpricesfalltoE”M.Thequasi-rentwoulddisappearbecause
thepricegetsequaltothetransferearning(OP).
SOURCE: ECONOMICDISCUSSION.NET
QUASI-RENT

14. Thank You