Define the Concept of Economic Rent.
This concept of Economic Rent was developed by Joan Robinson. It defines rent as the payment for the hire of a factor over and above the minimum amount needed to bring forth its supply. Economic rent can accrue to all factors of production.
According to Hibbdon, Economic Rent is the difference between the actual payment to a factor and its supply price or transfer earning. In the words of Boulding, 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. Modern theory of rent defines rent as economic rent which is the payment to a factor over and above what is required to keep the factor in its current employment.
According to modern economists rent is the difference between the actual earning of a factor unit and its transfer earning. Economic Rent = Actual Earnings — Transfer Earning, What is the factor of production is earning in its present occupation is called Actual Earning.
Transfer earning can also be called opportunity cost of the factor. Transfer earning is the expected earning of the factor from his next best occupation. There is an implicit assumption in the theory of rent. The rent is calculated on the basis of equilibrium price of the factor. The equilibrium price of the factor is determined when its supply equals demand.
In above Figure
Actul Earning = OLE W
Transfer Earning = OLEK
Economic Rent = OLEW — OLEK
Elasticity of supply of Factor and Economic Rent:
Assuming that demand curve of factor is downward sloping, there is distinct relation between price elasticity of supply (Es) of factor and economic rent of that factor. Higher the Es of factor lower the economic rent of that factor.
In the short, some factors are fixed, while in the long run they become variable. The payment to an input which is in fixed supply in the short run, is called the quasi-rent because it disappears in the long run (as the factors becomes variable), unlike rent which persists in the long run. In the short run, fixed input cannot be withdrawn from their present use and transferred to another where payments are higher while variable factor inputs are free to move to alternative uses here returns are the highest.
Thus, firms pay the variable inputs their opportunity costs while the fixed inputs receive what is left over. Hence quasi-rents are residual payment. This is illustrated in the following diagram.
Consider the short run equilibrium of a firm in perfectly competitive market. Let the price be P and the firm maximises its profit of the producing OQ units of output.
Its total revenue (TR) = OPeQ
The firms pays OCBQ = TVC to the variable factors (given by area under the total variable cost curve).
The fixed factors earn the residual c P e B, which is the quasi-rent.
Quasi-rent = TR — TVC = 0 PeQ – OCBQ
equal = CPeB
or Quasi-rent = TFC + excess profits
In the long run, the quasi-rent becomes zero and the firm in equilibrium, would be earning just normal profits. So the payment to a factor a fixed factor with fixed in supply in the long run is called the, rent while the payment to a factor which is fixed is supply only in the short run is called quasi-rent. Rents persists in the long run, whereas the Quasi-rent disappears in the long runs the factor becomes variable.