MODERN THEORY OF RENT

Ø  MODERN THEORY OF RENT
MICRO ECONOMICS/BUSINESS ECONOMICS

Ø  SHASHI AGGARWAL ECONOMICS AND LAW CLASSES

• MODERN THEORY OF RENT

1. DISCUSED BY J.S. MILL AND LATER ON DEVELOPED BY JEVONS,PARETO,MARSHALL,JOAN ROBINSON ETC.
2. ECONOMIC RENT IS A SURPLUS WHICH IS NOT SPECIFIC TO LAND ONLY. IT CAN BE PART OF THE INCOME OF LABOUR,CAPITAL AND ENTREPRENEUR.
3. ANY PAYMENT TO FACTOR OF PRODUCTION WHICH IS IN EXCESS OF ITS TOTAL SUPPLY PRICE.
4. SUPPLY PRICE IS THE TRANSFER EARNING WHICH IS THE MINIMUM EARNING REQUIRED TO KEEP THE FACTOR IN ITS PRESENT OCCUPATION.
5. RENT IS A SURPLUS THAT ARISES DUE TO DIFFERENCE BETWEEN ACTUAL EARNING AND TRANSFER EARNING.
6. RENT = ACTUAL EARNING –TRANSFER EARNING

Ø  DEFINITION OF RENT

• STONIER AND HAGUE,”RENT IS PAYMENT IN EXCESS OF TRANSFER EARNING
• MRS JOAN ROBINSON,”
• THE ESSENCE OF THE CONCEPTION OF RENT IS THE CONCEPTION OF SURPLUS EARNED BY A PARTICULAR PART OF A FACTOR OF PRODUCTION OVER AND ABOVE THE MINIMUM EARNING NECESSARY TO INDUCE IT TO DO ITS WORK.

• TRANSFER EARNING

1. MINIMUM EARNING WHICH A FACTOR MUST GET.
2. REFER TO THAT EARNING OF A FACTOR WHICH IT GETS IN THE NEXT BEST ALTERNATIVES  . IT IS ALSO CALLED OPPORTUNITY COST.  
3. EACH FACTOR OF PRODUCTION HAS DIFFERENT USES. WHEN WE TRANSFER IT FROM ONE USE TO OTHER WE HAVE TO SACRIFICE THE INCOME EARNED BY IT FROM EARLIER USE. SACRIFICE OF THE EARNING IS CALLED THE TRANSFER EARNING.                                                                                  

• WHY DOES RENT ARISE?

·         IT AGREES WITH THE OPINION OF RICARDO THAT MAIN REASON FOR EMERGENCE OF RENT IS THE SCARCITY OF LAND. SUPPLY OF OTHER LAND,LABOUR ,CAPITAL MAY ALSO BECOME SCARCE IN RELATION TO THEIR DEMAND.

·         PROFESSOR WIESER HAS DIVIDED ALL FACTORS OF PRODUCTION INTO TWO PARTS:-

1.       SPECIFIC FACTORS:-WHICH HAVE ONLY ONE USE. TRANSFER EARNING IS ZERO

2.       NON SPECIFIC FACTORS:-HAVE MOBILITY AND CAN BE PUT TO DIFFERENT USES.

3.       SPECIFIC NATURE OF THE FACTOR THAT GIVES RISE TO RENT. AND THE SCARCITY OF THE LAND

• FEATURES OF MODERN THEORY OF RENT

1. RENT CAN BE PART OF THE INCOME OF ALL FACTORS OF PRODUCTION
2. AMOUNT OF RENT DEPENDS UPON THE DIFFERENCE BETWEEN ACTUAL EARNING AND TRANSFER EARNING
3. RENT ARISES WHEN THE SUPPLY OF THE FACTOR IS PERFECTLY INELASTIC OR LESS ELASTIC

• DETERMINATION OF RENT UNDER MODERN  THEORY:-

1. DETERMINATION OF RENT OF LAND
2. DETERMINATION OF GENERAL RENT ON ACCOUNT OF DIFFERENCE BETWEEN ACTUAL EARNING AND TRANSFER EARNING

• DETERMINATION OF RENT OF LAND OR SCARCITY THEORY OF RENT

1. DUE TO SCARCITY OF LAND
2. DEMAND FOR THE LAND IS DERIVED DEMAND, IT MEANS THAT DEMAND FOR LAND DEPENDS UPON THE DEMAND FOR AGRICULTURE PRODUCTS. DEMAND FOR LAND IS ALSO INFLUENCED BY MARGINAL PRODUCTIVITY.
3. AS MORE AND MORE OF LAND IS USED THEN MARGINAL PRODUCTIVITY GOES ON DIMINISHING. DEMAND  CURVE IS DOWNWARD SLOPING CURVE
4. SUPPLY OF LAND FOR AN ECONOMY AS A WHOLE IS FIXED. SUPPLY IS PERFECTLY INELASTIC..

• DETERMINATION OF RENT OF LAND OR SCARCITY THEORY OF RENT
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3. DETERMINATION OF RENT WHEN SUPPLY IS PERFECTLY ELASTIC

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5. RENT WHEN SUPPLY IS LESS THAN PERFECT ELASTIC