Unit 8 Theory of Factor Pricing

-

               Unit 8 

    Theory of Factor Pricing

Rent:

 Rent is the payment made by a tenant to a landlord for the use of land. In economics, rent is the reward or price paid for the use of land or any factor of production whose supply is inelastic.



Contract Rent 

Contract rent is the total payment made by a tenant to a landlord for the use of land or other durable goods, such as a house, vehicle, or computer. It is also called gross rent because it includes several payments besides economic rent.
 
Contract Rent = Economic Rent + Interest + Profit + Depreciation Charges + Other Charges


Economic rent 

Economic rent is the part of a factor’s earnings that is more than its transfer earnings (opportunity cost). It is the payment made only for the use of land or a factor of production in excess of what it could earn in its next best alternative use.

Formula

Economic Rent = Actual Earnings − Transfer Earnings (Opportunity Cost)

Example

  • Earnings from growing rice = Rs. 50,000
  • Earnings from growing wheat (next best alternative) = Rs. 30,000

Economic Rent = Rs. 50,000 − Rs. 30,000 = Rs. 20,000

Answer: The economic rent is Rs. 20,000, not Rs. 10,000. 



  • Modern Theory of Rent (Simple Notes)




    Definition



    The Modern Theory of Rent was developed by Alfred Marshall, Joan Robinson, and Kenneth Boulding. It is an improvement over the David Ricardo’s theory of rent.


    According to this theory, rent can arise from any factor of production (land, labor, capital, or entrepreneurship) whose supply is limited relative to demand. Economic rent is the surplus earning of a factor over its transfer earnings (opportunity cost).



    Formula



    • Economic Rent = Actual Earnings − Transfer Earnings
    • Transfer Earnings = Opportunity Cost = Minimum Supply Price




    Key Points



    • Rent can be earned by all factors of production, not only land.
    • Rent depends on the elasticity of supply of the factor.
    • If a factor earns only its transfer earnings, it receives no economic rent.
    • If actual earnings are greater than transfer earnings, the excess is economic rent.




    Three Situations



    1. Perfectly Elastic Supply (Es = ∞)


    • Supply is perfectly elastic.
    • Actual Earnings = Transfer Earnings.
    • Economic Rent = 0.



    2. Perfectly Inelastic Supply (Es = 0)


    • Supply is fixed (e.g., land).
    • Transfer Earnings = 0.
    • Economic Rent = Actual Earnings (all earnings are rent).



    3. Elastic Supply


    • Supply is neither perfectly elastic nor perfectly inelastic.
    • Actual Earnings > Transfer Earnings.
    • Economic Rent = Actual Earnings − Transfer Earnings.




    Conclusion



    The modern theory explains that economic rent is the extra income earned above transfer earnings, and it depends on the elasticity of supply of the factor of production.







Comments

Post a Comment

Popular posts from this blog

Chapter 1 (Nature Of Organization)

-
              Chapter 1      Nature Of Organization    Concept of Organization An organization is a group of people who work together to achieve common goals. It is also a social group intentionally created to achieve the goals of the organization. People form organizations because some goals are too big to achieve alone. Working together allows sharing of skills, resources, and efforts.   Key Points to Remember: Organization = group of people + common goals Intentional creation = planned structure for achieving objectives Teamwork = more efficient goal achievement Organizational Goal Organizational goals are the objectives that every organization sets to ensure its continuous survival and success. These goals are made to achieve the organization’s purpose both in the present and in the future. Simply put, organizational goals are the desired future conditions that an organization wants to reach. They can be lon...
Read more