186 ESSENTALS OF Mnoa

thus, determined by
As The volume of rent is,
variable input, labour, diminishes. rent isa price
the price of the product. Thus,
tends to demand for land rises.
rise, price-detemining cost
population determined cost but not
arise since due to the
to Ricardo, rent must has emerged
accorading This sort of rent
to demand. of land.
supply of land is fixed in relation inelasticity
in the supply
and surplus
prices of corn rise DIFFERENTIAL
RENT
uenty, is Ricardo's
6.5.2.
Such a surplus
from
land emenges. quite likely
It is
that all lands are not of

scarcity rernt. are

uniform quality. Truly speakin8 lands
not
Land is fixed and homogeneous in quality. lands are
some more
homogeneous in quality;
Such differences in fertility
Land is used for the production of a single
fertile than others.
To explain Ricardo's concept of of land result
in the emergence
CTop-corm. or productivity
the following diagram. This sort of rent
economic has
scarcity rent, we use of economic rent.
the equilibrium Ricardo as differential rent
Panel (a) of Fig. 6.5 shows
been described by
farm, while panel (6) shows the
an agricultural
For the sake of simplicity,
we
assume that, Nov

same for the market.

SS is the market supply grades of land
there are three rise. Cc
initial demand curve
for the in our society,
curve. DD is the and Z is the inferior
where X is the superior
that intersects the SS
deman.

agricultural product land lies between X and

thus land andY grade of toOP,
at point H. The market output, market equilibrium has been
Z. In panel (d),
curve
the corresponding price is OP The farm accepts
mcrea

determined, is OQand shown. Product price

is OP. equilibrium at the
The corresponding Ricardo assumed that a marg
OP price.
level occurs at point E where MC MR =
this first in the superior rent

cultivator would produce

farm

AC. A farm thus produces Oq and sells it at its supply is limited, the land.
OP Since P AC, there is no surplus 9uality of land. As the next-best land not a
cultivator would then use
=
the price
and, hence, no rent whenever demand for corn rises consequent rises
that there is an increase in upon a rise in population.
Let us assume

population following
Malthusian logic. Thus, Panel (a) of Fig. 6.6 shows that a farmer
Surp-
results in an increase in in
a rise in population and sells Oq, output produced
the demand for Market demand curve Produces
corn.
superior-most enjoys a surplus
land and or

n o w shifts to D,D,
and it intersects the SS economic rent (the shaded area). As population
curve at point H,. A higher price of corn (OP,) rises, demand for corm rises. Since the supply ut
to feed mouths now, a
land is fixed, people would then use
thus results, and, more
of
X-grade
pressure to increase production developps. Ygrade land-a less-superior land. Panel (b)
Since land is supply, farms are noww
fixed in shows that at price OP the farmer sells Oq
forced to increase production by making more output and enjoys a smaller volume of surplus
intensive use of land. At a higher price OP, the
(the shaded area). Again, because of
the farm now produces Oq, where MC and population increase, the famer would now
use

AR, MR, are equal. Since revenues eamed

=

the
inferior grade land where production becomes

by the farm (OP,Tq,) exceed cost (ONRq,), Oq,. However, at the price OP, this output
fails

land, which was initially a free good, now has o yield any surplus and, hence, economic rent
an economic value. Thus the area NRTP,
is zero (in panel c) since P= AC. Ricardo called
represents economic rent or surplus. Further, this inferior or grade-Z land as the 'marginai
increase in the demand for com following a land'. Marginal land' does not yield any ren
rise in population will lead to an increase in Rent thus arises only in superior land (here
the price of com (OP,- determined by the X-category) and intra-marginal land(he
intersection of D,D, andSScurves at point H) Ycategory)land that lies betweensupen
and, hence, increase in surplus or rent. and marginal land.
 Hent arises in suponor

and intra-marginalland

MG MC
AG

No-rent
ang

Output
(a) x-Category () y-categoy (C) 2-calegory (d) Market

Fig.6.6: Diferential Rent

Now, if demand for will (ii) Lands are never cultivated in

com
price
rises,
rent will rise. Note that descending order of fertility as was
rise. Consequently, as

demand curve shifts to D,D, price of com rises assumed by Ricardo. Actually,
cultivation is pursued in accordance
to OP, Consequently, surplus or economic rent with the location of land and other
increases in all grades of land. Now the
reasons.
marginal land o r no-rent land yields economic
rent and this land becomes intra-marginal (iv) The concept of marginal or no-rent
land is not found in reality.
land. Thus, rent is a price-determined cost, but
not a price-determining cost. As price of com (v) According to Ricardo, rent is specific
arises
rises, rent rises. to land. In other words, rent
in the case of land. But modern
only
Further, economic rent is an 'uneaned
economists have demonstrated that
by the price of
surplus' since rent is governed rent arises not only in the case of land
Com. but also in the case of other factors of

Limitations Ricardo's theory of rent is production.

subject tocriticisms: (vi) Finally, Ricardo has shown that rent is

determined by the price of corn. That
() First, it may be objected that land does is to say, in Ricardo's theory, rent does
not have any original and indes- enter into cost of production. This
tructible powers. Such power of land Ricardian idea becomes true if we
can be changed in a scientific way.
consider the supply of land from the
(i) It is unrealistic to assume that land has viewpoint of the economy as a whole.
land has If of land is considered from
supply
only one use. Instead, used for the viewpoint of a firm or industry,
alternative uses. It can be
As Ricardo rent then determines and, hence,
price
variety of purposes. rent will enter cost of production.
one use, its
assumed that land has only
inelastic. A RENT
supply is completely 6.6. MODERN THEORY OF
be used for
particular plot of land may Modern economists have generalised
the
the production of either wheat or jute.
it w a s Ricardo (1772-
land has alternative uses, the supply concept of rent, though
the theory of rent
of land to a particular use
cannot be 1823) who first propounded Modem economists
and applied it to land only:
addressed as perfectly inelastic.
 AE OPESs
AE OPESS
MSP =
MSP =OPES
. Rent =0
.Rent OPES

AENT

Labour
Labour

ig. 6.8:Zero Rent

Fig. 6.7: Entire Eamings are Rent

coefficient of elasticity of supply is zero. This

argue that supply of all inputs is more or less its
inelastic. So, rent is enjoyed by all inputs means
that, whatever the price, supply is
including land. always OS. Even if the input is not rewarded
its supply would be fixed at COS. That is why
alternative definition of rent has been
An
given by moden economists. Economic rent is
the supply curve of this input is
completely
inelastic (e, = 0). Actual earming (or AE) of an
defined as the difference between actual earmings
determined by the intersection of the
and transfer earnings or minimum supply price input are
of any input. Actual eamings are the eamings demand curve for an input and the supply
what curve of that input. Thus, the actual earning
an
input actually earnsofafter rendering or the to OPES. Since
becomes equal
services a given period
for Transfer
time. input
eamings are the payments that must be paid to OPPportunity cost or minimum supply price(or
keep an input in its present use Transfer earming MSP) 15 zero, the entire earmings of the input
or the minimum supply price is the price that are economic rent (i.e. OPES).
must be paid to an input in order to retain its InFig. 6.8, we have drawn a perfectly
job. Thus, economic rent is a payment to any elastic supply curve of labour, PS. This means
input over and above what is required to keep that, at a
given price OP, any amount of labour
the input in its current
employment. In other will be supplied. Thus the minimum supplyis
words, economic rent is any payment in excess price of that input is OP. Actual earning
of transfer earmings or minimum supply price determined by the intersection of DD curve
or
opportunity cost.
Transfer eamings are and PS
point E. Actual earning
curve at
required opportunity cost of keeping
as
equals to OPEA. Since actual earning now and
input in its present use, or, it is regarded as
oPportunity cost are the same, labour does not
the input's supply price in its present enjoy any amount of economic rent.
occupation. Whenever an input does not have In case of an
an alternative use, its
upward rising
opportunity
becomes zero. Thus, the entire earnings ofcost
that
of an
input, part of its earnings supply curve
become ren
In Fig. 6.9, we have
input become rent. drawn a positively slopeu
The volume of economic rent Supply curve of labour,
SS,. Its slope indicates
the elasticity of depends on that as
price
of labour increases, its suppP
assume that the
supply any input. Let us
of increases. Demand curve DD intersects t n
supply of labour is perfectly
inelastic as drawn in Fig. 6.7. In the short Supply curve SS,
run, are,
at point E. Actual earning
the supply of labour be therefore, OPEM. actua Now these
inelastic. Here SS, is the
may completely earnings can be split into two parts
supply
curve whose OPPortunity cost and the economic rent
192 ESSENTIALS OF MICRO AND MACROECONOMICS
Quasi-rent may be defined as the differen
price. However, one point should be added between total revenue and total variable co
here. Land is more o r less fixed-both in the cOst,
short run and in the long run. But,thelabour, i.e.
be inelastic short
capital etc. may or
fixed in
run and not in the long run. In the long run,
Quasi-rent (QR)
=
TR- TVC
Since in the long run all costs are variable
all these inputs are to some extent elastic. That
is in the long run, rent element in and total revenue equals total variable costs
why,
of other factors like labour,
incomnes
capital etc. quasi-rent vanishes in the long run. Thus
becomes less. But land rent quasi-rent is the reward of man-made inputs
disappears or

whose supplies are fixed in the short run. We

always arises due to its high inelasticity even
in the long run. That is why, Marshall had to can explain quasi-rent in terms of Fig. 6.10.
say that: "The rent of land is the leading
species of a large genus.
At a price OP, the fim is in equilibrium at
point E. It thus produces OQunits of output
6.8. QUASI-RENT Total revenue is OPEQ while return to the
variable input is OSGQ. Thus, quasi-rent is
The term quasi-rent was coined by Alfred OPEQ-OSGQ = SGEP. At output OQ since
Marshall. Economic rent, as defined byy
the firm incurs a fixed cost of RFGS, it enjoys
and modern
Ricardo to is a long run
economists, In the profit of RFEP amount. This excess profit is
reward input,
any iîncluding land.
short run, some inputs are fixed and some are the difference between quasi-rent and total
fixed cost, i.e.
variable. But in the long run inallthe
inputs run
are

variable. Economic rent persists long QR = TFC + excess profit

while quasi-rent arises in the short run. Fixed
inputs in the short period receive a quasi-rent. r QR = SGFR + RFEP

It evaporates in the because in the

long run In the run, the firm earns
andlong
quasi-rent then becomesonly
normal
long period there are no fixed inputs. Marshal profit zero.
argued that quasi-rent arises in the case of
man-made inputs (like machines, buildings 6.9. DISTINCTION BETWEEN
etc.) whose supplies are inelastic. Since the MONEY OR NOMINAL
supplies of these inputs are variable or elastic
in
WAGE AND REAL WAGE
the longisrun, quasi-rent disappears. Thus,
quasi-rent an ephemeral reward; it is of a
temporary nature. As it is not a true rent itis
What a labourer earns after rendering his
services in a factory or office is called wage
called quasi-rent. True rent or long run rent
refers only to factory which are fixed in Wage is considered both from micro and macro
supply. point of view. What a labourer earns per day
or week or month for
his service done in
factory is called
a
OR TR-Tvc wages. This is the meaning o
wage in the micro sense. In the macro
SMC sense
wage refers to the allocation of national income
SAC among wage-earners.
AR MR Money wage or nominal wage is the wage
AVC that a worker eams after
in an office or rendering his ser
Often a worker
factoryper day or per mon
receives his wage party
money terms and partly in kind. The
of goods and services amou
which the labourer ge
Output inexchange of his labour service is called re
Fig.6.10:Quasi-rent wage. A worker gets furnished quarte
medical
facility, cheap food items etc.
 6.6.1-
Positive and
zero ren
On
contre
rent is
the p
Zero rent
Acco
enter
price
deter
price
Labour Worc

rent
Fig.6.9: Mix of the Two high

unit of labour is supplied com

Suppose OM,-th area under the mar
cost is the
whose opportunity
Its actual earnings a r e ma
supply curve, i.e. M,N, labour Or
M.P,(=OP). Thus, the OM,-th unit of ren
to the tune of P,N, or SN,P,P area.
earms rent rent of
unit of labour enjoys the
Similarly, OM,-th
since actual earnings (M,P2) de
P,N, amount the OM-th
ber
exceed opportunity
cost (M,N,). For and
l a b o u r - since
actual earnings
unit of cost are
equal-noeconomic
rent
a
opportunity unit of labour
words, OM-th le:
accrues. In other rent.
economicC cost
or
does not receive any surplus
labour, opportunity la
But, for OM units of OSEM area
or
minimum supply price equals
OPEM. Thus, OM
earnings are
while actual rent to the
extent of PSE.
unuts oflabour get
the volume of
conclude that
Thus, we can of
o n the elasticity
depends of
economic rent Greater the elasticity
input.
Supply of any economic
is the
and, lower
rent,
Supply lower is the e c o n o m i c

he elasticity of supply, greater

rent.
economists challenged
modern
Finally, rent is price
contention
This
Kicardo's price-determining.
not
determined but only
when the
Ricardo is correct
lew of land is viewed f r o m the society's
Supply of situation, opportunity cost is zero
angle. In thishas n o alternative use. In such a
Since land But from a
price-determined.
Suation, rent is view, opportunity
dustry's point of
fim's or industr ent
r e n t will then determine
is positive. So, Ricardo argued.
Ost other way, as
price and not the