Rent
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Production is the result of the efforts of four factors of
production. The price that the owner of land gets for
allowing its use is generally termed as “rent”.
In general, rent is defined as “a payment made for the
use of a material asset for a specified period of time.
But in economics by rent we mean the price paid for the
use of land only other kind of usage of a material asset
is called Contract Rent and not Rent.
Therefore, to be explicit the surplus earning of a factor
of production whose supply is less than perfectly elastic
is called rent in economics.
Definition of rent
Rent definition
Ricardian’s view
Marshall’s view
Modern concept view
Before defining rent according to Ricardo lets first understand
what do we mean by Rent.
Land means all those gifts of nature in their original form which
can neither reproduce by man or destroyed by him. Simply
speaking land does not only mean the upper layer of the soil but
also all that lies above or below the surface of earth. So forest
resources minerals, fish or water are all included in the category
of land.
Definition of rent according to
Ricardian’s view
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According to him “rent is defined as the price paid for the use of
original and indestructible powers of soil.”
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To make the meaning of rent more understandable he has further
divided rent into two : Gross rent and Economic rent
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Gross rent: Rent paid under contract i.e. beside the price paid for
the use of land, which includes interest on capital which is invested
on the land e.g. tanks, wells and wages for the supervision of land
Economic rent: is the only price paid for the services of land.
Ricardo was of the opinion that only land earns rent because its
supply is perfectly inelastic. Its supply cannot be changed and it is
also a free gift of nature
Definition of rent according to
Marshall’s view
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Marshall defined rent as the income derived from the
ownership of land and other free gifts of nature.
Marshall extended the term rent to include in it also the
payment to man made equipments who supply is
inelastic like that of land in the short run. He called it
“Quasi Rent”
According to Marshall land is a free gift of nature only
from the society point of view a s whole. But when it
comes to particular person firm or industry it is available
at price and supply is not perfectly inelastic
Definition of rent according to
modern concept
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According to it rent is defined as a “surplus”.
The income which a factor earns over and above
its minimum earning is a surplus called “Rent”.
This minimum earning is also called transfer
earning
Transfer earning: It is the minimum payment
which a factor must earn in order to stay in the
present use.
Determination of rent
There are manly two theories given by the economist in
order to determine rent.
Rent Determination
Ricardian theory of rent
Modern theory of rent
Ricardian theory of rent
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a)
b)
Ricardio said that rent is a surplus which accrues to the
owners of land by reason of relative advantage of
fertility or situation or both which a particular plot of
land enjoys over less productive land.
Thus, Ricardo defined rent as “Rent is that portion of
the produce of the earth which is paid to the land lords
for the use of original and indestructible power of the
soil”.
Thus, rent can arise due to two reasons:
Difference in the productivity of various pieces of land
Situational differences
Assumption of the theory
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Fixed supply of land
Original powers
Indestructible powers
Cultivation in order of fertility
Law of diminishing returns
Difference in fertility
Free gift
Perfect competition
Long run
Marginal land: which is just covering its cost only i.e. income from it
is equal to its cost
Different situations
Explanation of the theory
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a)
b)
According to this theory rent arises due to niggardliness of nature and
two facts leads to niggardliness
Land is fixed in supply
It differs in fertility
Ricardo considered as a surplus which arises due to the differences in fertility
and situation. He took the assumption of the marginal land for explaining
the origin of rent margin rent is also called no rent land. The land which
has higher productivity than this marginal land is called Intra marginal
land And according to Ricardo, rent is a surplus which is the difference
between marginal and intra-marginal lands. Hence all the plots of land
which produce more than the marginal land earn rent. So we can say
that Ricardo believed rent to be a differential surplus earned by intra
marginal lands over the earnings of marginal lands
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There are two farming techniques : Intensive cultivation and Extensive
cultivation. Rent arises in both techniques.
Techniques
Farming techniques
Extensive cultivation
Intensive cultivation
Origin of rent under Extensive
Cultivation
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Extensive cultivation is the type of farming
under which production is increased by using
more land.
Grade of land
Surplus i.e.
A
Production
(in tons)
25
B
20
20-10=10
C
15
15-10=5
D
10
10-10=0
Rent in tons
25-10=15
RENT ON LAND A
PRODUCTION (IN TONS)
25
RENT ON LAND B
20
RENT ON LAND C
15
NO RENT LAND
10
5
O
A
B
C
D
GRADES OF LAND
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Hence rent is the surplus between the
production of the marginal and intra
marginal lands
Origin of rent under Intensive
Cultivation
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It is second type of farming. Here on the same piece of
land, more units of labor and capital are employed to
increase the production.
Hence minor production will go on diminishing. Here
marginal product refers to the addition made to the total
production by using one more unit of labor and capital,
other factor units remaining constant.
The under given table explains that the first second and
third units on rent not due to the difference of the fertility of
land but due to diminishing returns on the same piece of
land
Units of Labor and
Capital
Marginal
Production
(in tons)
Surplus Production
or Rent (in tons)
1st
25
25-10=15
2nd
20
20-10=10
3rd
15
15-10=5
4th
10
10-10=0
RENT OF UNIT 1st
PRODUCTION (IN TONS)
25
RENT OF UNIT 2nd
20
RENT OF UNIT 3rd
15
NO RENT UNIT OR
MARGINAL UNIT
10
5
O
1st
2nd
3rd
4th
UNITS OF LABOUR AND CAPITAL
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Thus ricardo rent was a surplus which the
intra marginal lands and units of labor and
capital earn over and above the
production of marginal units or marginal
lands
Criticism of Ricardo theory
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No original and indestructible powers
Historically wrong
Neglect of scarcity rent
Wrong assumption of perfect competition.
Wrong assumption of no rent land
Every land has fertility
Rent element in all factors
Rent enters into price
It fails to determine rent
Wrong idea of the application of the law of diminishing
returns
Conclusion of the theory
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Though this theory fails to determine rent
but it occupies an important place in
economic theory the nature and origin of
rent stands as the singular contribution to
understanding of the determination of
factors shares. All the other theory is
simply a modification or improved version
of their theory
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Modern theory of rent is an improvement over
the Ricardian theory is that it is not only land
which can earn rent but other factors of
production i.e. labor, capital, organisation and
entrepreneur are also entitled to rent. Land is
scare. So it earns scarcity rent. Lands differ in
fertility. So they earn differential rents
The Ricardian theory was failing to determine
how rent is determined but their question was
answered by modern theory.
To determine rent the modern economics have
developed & supply theory for the purpose.
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The theory is also known as ‘Scarcity
Theory of Rent’ the theory explains that
rent doesn’t arise due to fertility
differences of land alone but due to more
demand in relation to supply of all factors.
The more the scarcity of land and the
other factors, the higher will be the size of
rent earned. Hence the forces of demand
and supply together determine rent
Demand Side
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The demand for land is indirect or derived. In
fact, land is demanded for it produces
something. The higher is the demand for the
goods produced on land, the demand for land
itself will be more therefore the price of land
(rent) will be more and therefore the price of
land (rent) will be higher. Marginal productivity
of land determines the demand for it. As we go
on investing more and more on the same land,
its marginal productivity of land equals its price
which is rent.
Supply Side
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The supply of land can’t be altered for the society as a
whole.
We know that land has alternative uses i.e. it can be
used in several ways. So, for a particular industry or firm
or individual, the supply of land can be changed, i.e. it is
elastic. Any individual can get more land by bidding up
its price. Hence the supply curve of the land for an
individual firm or industry is having an ‘upward slope’.
Rent is determined at the point where demand for and
supply of land intersect each other. This is shown
through a diagram given below.
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Modern theory is also applicable when
land differs in fertility
The different-fertility lands will have
separate demand curves for them. The
price for more fertile and better situated
land will be higher than those of the
others. And their equilibrium
RENT
D1
S
D
R1
E1
D2
R
E
R2
D1
E2
D
S
D2
O
Q2
Q
Q3
DEMAND AND
SUPPLY OF LAND
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Modern theory is also applicable when
lands differ in fertility
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The different-fertility lands will have
separate demands curves for them. The
price of more fertile and better situated
land will be higher than those of the
others. And their equilibrium rents will also
be higher than those of the less fertile and
relatively less favorably situated lands.
Rent as a surplus
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Modern economists agree to the idea of
the surplus being rent as advocated by
Ricardo. But they differ on the point that
rent is earned only by land. Modern
economist are the opinion that other
factors of production than land can also
earn rent. The features of in-elasticity of
supply is also found among other factors
of production in the short run.
Rent and transfer earnings
Rent =Actual earning – Transfer earning
Where:
 The income which a factor actually gets from its
present work or job is called its ‘actual earning’
 Transfer earning refers to the price which a factor unit
must get in its present use in order to stay in its
present employment.
Specific and non-specific factors
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Specific factors are those which can be put only
to one use. These have no alternative use in
other words, they have no next based use. So,
their transfer earning is zero. And the whole of
their actual earning is rent. On the other hand,
non-specific factors are those which can be put
to more than one uses. They have alternative
uses.
Hence the share of rent is specific factors is
more than that in the non-specific ones.
The supply of land as a factor of production
can be of three types:
 Perfectly Inelastic Supply
 Perfectly Elastic Supply
 Elastic Supply
Perfectly Inelastic Supply
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From the society's view point, land supply
cannot be either increased or decreased.
It is a given. It has no alternative use. So,
it has no transfer earning. The whole of its
actual earning is rent.
PRICE
D1
S
D
E1
P1
E
P
D1
D
ACTUAL EARNING
=RENT
O
S
DEMAND AND SUPPLY OF LAND
Perfectly Elastic Supply
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It means that we can get land as much as
we desire at a given price of it. It is
possible only when the transfer earning of
the all units of land is the same. In this
situation, transfer earning (TE) will be
equal actual earning (AE). So no rent will
be earned.
PRICE AND RENT
D
D1
E1
E
P
S
NO RENT EARNING
D1
D
O
M
M1
DEMAND AND
Elastic Supply
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But, actually for a particular firm or
industry, supply of land is neither perfectly
inelastic nor perfectly elastic. It is in
between these two. Hence supply of land
is less elastic. In this situation, actual
earning will be more than its transfer
earning. So rent will be earned equal to
the difference between these two.
PRICE
D1
D
S1
E1
P1
RENT
E
P
EARNING
S
D1
D
O
M
M1
DEMAND AND SUPPLY OF LAND
Modern Theory as an Improvement
Over Ricardian Theory of Rent
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Amplification of Ricardian theory
Modification of the Ricardian Theory
Rent and Price
RENT VERSUSES QUASI-RENT
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If we study the concepts of rent and
Quasi-rent, we find that there are a few
similarities, and some differences between
the two. We can discuss both of these
here.
Similarities
a)
b)
c)
d)
Rent and Quasi-rent both are surplus or excess
earnings.
Both arise due to rise in demand for land and
man-made factors.
Rent and Quasi-rent are similar also because
both accrue due to the fixed or inelastic supply
of factors.
Rent and Quasi-rent are both measured by the
differences between the actual earning and
transfer earning of a factor
Differences
Despite the similarities given above, rent and
Quasi-rent differ. The following points show it
:
i.
Rent is earned by the free gifts of nature such
as land. But Quasi-rent is the excess income
earn by the man-made factors.
ii.
Rent is earned both in short run and long
run. While Quasi-rent occurs only in short run
because in the long run, man-made factors
have their perfectly elastic supply.
iii.
iv.
v.
Rent is permanent earning while Quasirent is transitory. In other words, Quasirent is not a cost in the short period.
Rent is never zero. But Quasi-rent
becomes zero when price is equal to
average variable costs.
Rent is the difference between total
earnings and total costs. But Quasi-rent
is the difference between total earnings
and variable costs.
Rent is an un earned income while
Quasi-rent is a necessary payment for
the firm to produce the output.
Hence rent and Quasi-rent differ mainly in
the duration of the time period. The
former belongs to the short run as well
as to the long run. While the later arises
only in the short run.
vi.