1. MODERN THEORY OF
RENT

2. DR. LAXMI NARAYAN YADAV
ASSISTANT PROFESSOR OF ECONOMICS
GOVT. P.G. COLLEGE MAHENDERGARH
E-mail: laxmi_narayan70@yahoo.com

3. DEFINITION
Boulding: Economic rent may be defined as
payment made to a factor of production in excess of
the minimum amount necessary to keep the factor
in its present occupation.
In modern economic usage, rent is represented as
the difference between the total return to a factor of
production (land, labour, or capital) and its supply
price—that is, the minimum amount necessary to
attain its services.

4.  The modern economists like Pareto, Mrs. Joan
Robinson, Boulding, Stigler, Shepherd, opined
the Ricardian theory of rent is too closely
related to land.
 Boulding and Joan Robinson emphasized that
whenever the supply of factor units to an
industry or economy is not perfectly elastic, a
part of the earnings of a factor will consist of
surplus or economic rent, since the full price
they get are not necessary to make all the
factor units available.

5.  According to the modern theory of rent, the
rent of a factor, from the point of view of any
industry, is the difference between its actual
earnings and transfer earnings.
Rent = Present Earnings - Transfer Earnings.
 Transfer earning refers to the amount of
money, which a factor of production could earn
in its next best-paid use (opportunity cost).

7. Whole
produce is
rent D`
D
Here Present Earnings =
ORxOS = ORES
Transfer Earnings = Zero
Rent = Present Earnings
- Transfer Earnings.
Thus Rent = ORES
E
S`
R
O S
Hectare of Land
Price

8. Now if demand increases from DD’ to D0D0
Then Rent increases
from ORES to OPFS
D0
F
D0
S`
E
D`
D
R
O S
P

9. Rent = Present Earnings
- Transfer Earnings.
Here:
Present Earnings = OSEM
Transfer Earning = OSEM
Rent = OSEM-OSEM
= ZERO
E
S`S
O M
Hectare of Land
Price
D`
D

10. Then Present Earnings
increases from OSEM to OSFN
Transfer Earning also
increases to OSFN
Rent = ZERO
D0
F
D0
Now if demand increases from DD’ to D0D0
N
E
S`S
O M
Hectare of Land
Price
D`
D

11. Ath unit of Factor has a supply price equal to
AQ. In other words, AQ must be paid to the Ath
unit of land in order to keep it in the wheat
industry.
Ath unit of land
obtains price (AH
= OP) while its
transfer earnings
are only AQ.
Therefore, Ath unit
of land earns QH
as economic rent
(QH = AH-AQ)F
I
D
K
B
R
C
J
S
T
E
L
U
S
S
O
Price
M
D
D
H
A
Q

12.  Rent can be a part of the income of all factors of
production. Entire income of land is called rent
because its supply is perfectly inelastic. But in this
case of other factors, only a part of their income is of
the nature of rent.
FEATURES OF
MODERN THEORY OF RENT
 Rent can be a part of the income of all factors of
production. Entire income of land is called rent
because its supply is perfectly inelastic. But in this
case of other factors, only a part of their income is of
the nature of rent .

13. FEATURES OF
MODERN THEORY OF RENT
 Amount of rent depends upon the difference
between actual earning and transfer earning.
 Rent arises when the supply of the factor is
either perfectly inelastic or less elastic . On the
other hand no rent arise when the supply of the
factor is perfectly elastic.

14. AMPLIFICATION OF RICARDIAN THEORY
According to the Ricardian theory, rent is that portion of
the produce of the earth which is paid to the landlord for
the use of the original and indestructible powers of the
soil. Rent therefore is peculiar to land alone. It is not
available to other factors of production. But according to
modern theory, rent is also earned by other factors, such
as labour, capital entrepreneur etc, reason being that
rent arises when a factor becomes either specific or its
supply less than perfectly elastic.
MODERN THEORY IS A MODIFIED AND
AMPLIFIED FORM OF RICARDIAN THEORY

15. MODIFICATION OF RICARDIAN THEORY
Modern theory of Rent has made the following modification:
Measurement of Rent: According to Ricardian Theory, rent
is the difference between the produce of marginal land and
that of intra marginal lands. This concept is based on the
assumption that there does exist a land that earns no rent,
but in reality there does not exist any land. Consequently,
rent in Ricardian sense cannot be measured. According to
modern theory, rent is measured from the difference between
actual earning and transfer earning.
MODERN THEORY IS A MODIFIED AND
AMPLIFIED FORM OF RICARDIAN THEORY

16. Cause of Emergence of Rent : The logic given by
the modern theory regarding the cause of emergence
of rent is more realistic. According to Ricardo,
scarcity of land gives rise to rent. Because of scarcity
of land, people have either to use of inferior land or
put more and more units of labour and capital on
the same piece of land. There is difference in amount
of produce of inferior and superior land. Due to
difference, superior land enjoys some surplus over
inferior land.
MODIFICATION OF RICARDIAN THEORY

17. Rent and Price : Modern theory is a modified form
of Ricardian theory, in respect of relation between rent
and price. According to Ricardo, rent does not enter
into price. But according to modern economists it is
not wholly true. They hold that from the point of view
of an economy, rent does not enter into price.
MODIFICATION OF RICARDIAN THEORY

18. There are two views of economists in respect of rent and
price : (i) Ricardian view (ii) Modern view
RENT AND PRICE
Ricardian View
Ricardo is of view that the rent does not enter in price. It
is price that influences rent and not rent that influences
price. Ricardo’s view is based on the assumption that (i)
supply of land is limited for the society (ii) land has no
cost of production and (iii) land has only one use.
Marginal land is no rent land. It does not yield any rent.
However price of agricultural produce is determined by
the cost of production of the produce raised on marginal
land.

19. Modern view of rent is more comprehensive and logical.
According to this theory, it is wrong on the part of
Ricardo to assert that rent never enters into price .
Modern economists view the relationship between rent
and price from three different angles:
 From point of view of Economy
 From the point of view of industry
 From the point of view of firm
Modern View
RENT AND PRICE

20. From point of view of Economy
From the point of view of the entire economy, land is a
free gift of nature. Total supply of land is perfectly
inelastic, so there is no need of paying any minimum
supply price for its use. In other words, from the point of
view of economy transfer earning of land is zero.
Accordingly, entire earning of land is a surplus or rent.
Modern View
RENT AND PRICE

21. From the point of view of industry
Land can have alternative uses for an industry. In order to make
use of land, the industry will have to pay a minimum price
equivalent to its transfer earning.
Rent and Price: Modern View
If more price than the transfer earning is required to be paid
for the land for a given industry, then the amount by which the
price is more than transfer earning will be called its rent.
Thus from the point of view of industry, transfer earning of the
land is included in the cost and so influences the price; but the
income, over and above the transfer earning, called rent, is not
included in cost and accordingly does not influences the price.

22. Price that an individual producer pays for the land, is
very much a part and parcel of his expense and so is
included in the average cost of production of the
commodity. As such from the point of view of an
individual producer, rent influences price, that is, rent
enters price of the product
From the point of view of firm/individual producer
Rent and Price: Modern View

23. RELATION BETWEEN RENT AND PRICE
AREA RELATION
From the point of
view of an economy
Entire income of land will be called
rent, but rent will not enter price
From the point of
view of an industry
(a)Minimum price or transfer earning of
land will enter in price
(b)Earning of land which is above the
transfer earning is called rent and
does not enter in price
From the point of
view of a Firm
Rent enters price ; i.e., influences the
price

24. According to Ricardian, rent is peculiar to land
only. But the modern economists hold that
rent can be a part of the income of each factor
of production .
DIFFERENCE BETWEEN RICARDIAN
AND MODERN THEORY OF RENT
 According to Ricardian Theory, rent is the
reward for the original and indestructible
powers of the soil. Modern theory of rent
attributes it to the difference between actual
earning and transfer earning.

25.  According to Ricardo, rent does not enter into price.
Rent is not price determining, it is price determined.
But according to modern theory of rent, relation
between rent and price is not so simple, from the
point of view of an economy , rent does not enter in
price , but from the point of view of a firm it does not
enter into price
DIFFERENCE BETWEEN RICARDIAN
AND MODERN THEORY OF RENT