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THEORY OF
RENT
COMPILED BY: RUTVI FULET
BBA 1ST YEAR
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CONCEPT OF ECONOMIC
RENTIn ordinary sense, the term RENT refers to any
periodic payment made regularly for the hire
of any durable goods, such as a house, land,car, machine,
etc.
Where as in economic sense rent is used in the
sense of payments made for factors of
production which are perfectly inelastic in
supply.
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It is taken in the sense of surplus payments or
additional payments made to factors notbecause of any efforts or
activity on the part of
factor-owner, but because of perfectly inelastic
supply of the factor.
And hence, the economic sense of rent is known
as ECONOMIC RENT.
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RECARDIAN CONCEPT
Classical economists like Ricardo used economic
rent in very restricted sense as the payments
made or price paid for the services of land andother natural
resources, which are free gift of
nature.
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DAVID RICARDO
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The classical economists used the term
EC
ONOMIC
RENT for the payment made bythe farmer to the landlord for the
use of land,
and its entire payment is surplus in nature.
Total payments made by the farmers to the
landlord may partly be for the use of services
of land and partly for other things, such as
farm building, wells, drains, investment made
in the improvement of land, etc.The gross payment made for the
services of land
and other services is called contractual rent.
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MODERN THERORY OF RENT
Modern economists use the term rent in a
broader sense to include the payment made to
all those factors of production that are ininelastic supply.
Modern Theory of Rent is associated with the
names of Joan Robinson, Benham and
Boulding.
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ECONOMIC RENT is defined as any payment
made to a factor of production in excess of theminimum amount
necessary to keep the factor
in its present employment. It is the surplus
payment over and above what is necessary to
keep the factor in its present employment.
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ECONOMIC RENT = ACTUAL EARNING
TRANSFER EARNING
Transfer earning is the amount that a factor of
production must earn in its present use toprevent it from
transferring to another use.
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DIVISION OF FACTOR
EARNING INTO EC
ONOMIC
RENT AND TRANSFER
EAERNINGS
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WHEN FACTOR SUPPLY IS
PERFEC
TLY ELASTIC
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The whole price OP = transfer earnings of factor
OP X ON = actual earning
ACTUAL EARNING = TRANSFER EARNING
Therefore, ECONOMIC RENT = 0
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WHEN FACTOR SUPPLY IS
PERFEC
TLY INELASTIC
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Transfer earning = 0
The Whole factor price = Economic Rent
Actual Earning is OPEN which is all economicrent, because a
decrease in this earning would
not include any unit of the factor to move
elsewhere.
E.g. Film Stars, whose supply is fixed
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WHEN FACTOR SUPPLY CURVE IS
POSITIVELY SLOPED
R
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Actual Earning = OPEN
Aggregate Economic Rent = RPE
Aggregate Transfer Earnings = OREN
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THANK YOU
