Meaning * In economics, Rent is that type of payment which is made to the owner of the land for the use of land.Types Of Rent Contract Rent Economic Rent | Gross Rent * The payment which is made to the landlord for the use of land is | called gross rent. * It consists of the following elements: > Economic rent which is paid for the use of land. > Payment as interest on capital Investmente.g. well etc. >» Remuneration for Risks » Managerial Expenses Gross Rent = Economic Rent + Interest on Capital Investment + Remuneration for Risks + Managerial ExpensesEconomic Rent Acc. To classical economists or David Ricardo Rent is the payment for the use of land is called economic rent. It is derived from the ownership of land and other free gifts of nature. It is the difference between the costs of super- marginal lands and marginal lands. Acc. To modern economists it is a surplus over | the opportunity cost of a factor of production. | Economic Rent = Gross rent — (Interest on Capital invested + Remuneration of Risks + Managerial Expenses)Contract Rent * It is rent which is determined mutually by an agreement between the landlord and the cultivator. * Contract rent may be greater or lesser or equal to economic rent depending upon the supply of land and demand for land for cultivation purposes. Economic rent vs. Contract rent be uld Perea lg Imaginary and theoretical concept Difference between the cost of super- marginal land and cost of marginal land. Increases with the decrease in the produce of marginal land and Decreases with the increase in the produce of marginal land. It does not exploit the tenants as there is no high rent because no marginal land exists. Accrues to all the factors of production. Not predetermined because it depends upon the fertility and location of land. Practical and realistic concept Determined between landlord and cultivator on the basis of economic forces of demand and supply. Not affected by the change in the produce of marginal land and it is affected by the contract deed between the land lord and the tenants. Chances of exploitation of peasants when demand for land increases. Accrues to the owner of land. Itis certain and predetermined because it depends upon contract between land lord and tenants.Ricardian theory of rent * Classical theory of rent ---known as Ricardian Theory of rent * Propounded by —David Ricardo * According to David Ricardo, “Rent is that portion of the produce of the Earth which is paid to the land lord for the use of the original and Indestructible powers of the soil.” Two things: 1. original and Indestructible powers of the soil 2. Niggardliness of nature | Assumptions 1) Rent is the payment for the use of land.(original and indestructible powers of land) 2) Most fertile land first brought under cultivation and thereafter less fertile. 3) Marginal Land or no rent land---the value of produce on such land= cost of production of the produce. 4) Landis used for the production of food grains only and not for other uses. 5) Perfect competition in factor and commodity market. 6) The law of diminishing returns operates in agriculture. 7) Renton land arises either due to differential fertility or due to differential situation of land.Rent under Extensive cultivation Determination of Rent Difference in location Differentials in Fertility Rent Under intensive Cultivation ea Ue sofland Produce( Cre) eed Ca ere) RE pe TT (quintals)Ce eae fe (quintals) Eur (quintals) Marginal Tc) Pred (quintats) Irrespective of same quantity of output identical in fertility, rent differs due to difference in location of land. Land located nearerto Mandi-Rentis less as there will be lesstransportation cost Land located far away from Mandi-Rentis more as therewill be more transportation costCriticism of the theory 1 Original and indestructible power of soil are imaginary 2) Absence of Historical Evidence 3) Absence of no rent Land or Marginal land 4) Rent arises due to scarcity of land 5) Rent elementin all factors of production 6) Unrealistic and imaginary assumption 7) Law of diminishing returns can be postponed 8) Rent does not determine price 9) Labour and capital are not a single identical factors of production. Modern Theory of Rent * Modern economists criticized Ricardian theory of rent. According to this theory rent not only arises in case of land but other factors of production namely labour , capital, entrepreneur and organization may get rent during SHORT period because their supply cannot adjusted to their demand.Basis of the Theory > Any factor of production can be easily obtained. > Any factor of production which is specific at a time may also become non specific in future. > There is partial specific and partial non-specific characteristicsin each factor of production. reeset dcolel adel} © Used in specific * Factors which can purpose only be put to various * Do not have uses. business mobility Modern theory is based on this specific characteristics of a factor. Each factor of production has his characteristics of partially specific and partially non-specific. Each factor of production has RENT element to the extent to which the factor is specific. Explanation * This theory explains that rent is a surplus to any factor of production over its actual earning at present in any use. * Transfer earning is the minimum remuneration which is to be paid to any factor of production in order to maintain that factor in that industry or use. * Higher the payment over transfer earning of any factor higher will be the rent.Economic rent= Actual earning-Transfer Earning *. Perera is the surplus over the total actual earning and transfer earning. eee ud nomic rent: it | Transfer Earning: it isa check on ithe transfer of ithe factor from one use to another. /Opportunity Cost 4,000 4,000 4,000 0 4,000-0=4,000 4,000 3,000 4,000-3,000=1,000 4,000 5,000 1,000{the factor will leave the industry and earn 5,000 which is actual earningand it is surplus over the actual ‘earning(5,000-4,000) - Vv v The Higher the difference between actual earning and transfer earning of a factor of production higher will be the rent of that factor of production. If the transfer earning is zero then whatever the paymentis received by the factor of production will be rent. If the total earning is transfer earning then there will be no rent or rent will be zero. Causes of Arising Rent Rent arises on account of the specific use of any factor of production. More a specific of factor of production more is the rent on that factor. The specific characteristics of a factor will be only when that factor of production is scarce or its supply is limited to its demand. The rent is the result of specificity and it can be found in any factor of production if its supply is less than perfectly elastic or inelastic.Explanation with the help of Diagram _ Perfectly Elastic supply of a Factor and Zero Rent W Supply of a Factor is Perfectly Inelastic and Rent If the supply of Factoris perfectly inelastic, When the supply of a factor of production is perfectly elastic then the factor will not earn rent because at a given price unlimited supply of that factoris available. There is no surplus over the transfer of that factor and the rent is zero the transfer earning of the factor will be zero and whatever the income is rent, the factor of production has the specific use which cannot be used else where and the transfer earning or opportunity cost of such factor is zero and the payment received by the factor is totally rent. | Explanation with the help of Diagram | Less than perfectly elastic supply and rent sore = ‘Quantity of Factor * Ifthe supply of a factor is less than perfectly elastic then we can say that the factor of production is partially specific and partially non-specific. The income received by the factor is the mixture of opportunity cost and rent. Economic Rent=Actual Earning of the = OLEW-OLES =WES factor- Transfer earning of the factorComparison between Ricardian Theory and ___Modern Theory of Rent Cees een ee ce) CUT ru) Meaning of Rent Rent is paid for the use of Rent is surplus over the transfer original and indestructible earnings of a factor of powers of land to the landlord. production. Causes of Rent Differentials in fertility of land Scarcity of a factor of production and its location. or specific use of a factor. Calculation of Rent Difference between Marginal _Difference between actual land and super marginalland. _ earnings and transfer earnings. Rent and Price Rent does not affect price but Rent is a part of cost of it is affected by price. production from the point of an individual producer and it affects the price. Realistic or Based on Imaginary and More realistic and useful. imaginary unrealistic assumptions. Hence not an useful theory. Quasi Rent * Concept was propounded by Alfred Marshall. * According to this concept of rent the income derived from machine and other man made appliances, tools , equipments during short period the supply of these cannot be changedis called quasi rent. * Itis a surplus earned by machine in the short period over its running cost which shows how much the short period earning from a machine exceeds the short period cost of maintaining it. * Quasi rent is related with the short period only as the supply of factors being stable. * With the expansion of time the quasi rent disappears because all the costs and variable costs and factors of production are variable , no factor of production is fixed. Quasi Rent= Total Revenue- Total Variable Cost QR= TR-TVC