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 is
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. Residual-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. Marginal 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.”