Tiêu đề Modern Theory of Rent ss short.pdf ✅

Modern Theory of Rent David Ricardo defined rent as the payment made to the owner for the original and indestructible powers of the soil. In Ricardo theory, Rent only accrue to land only (means the amount of rent that has accumulated or increased over a period of time.) but in the modern theory of Rent, rent can be accrue to all factors of Production. The modern theory of rent is an extension of the classical theory of rent proposed by David Ricardo. It was first discussed by John Stuart Mill, which was later developed by economists such as Jevons, Marshall, Pareto, and Robinson. Although land is a free gift of nature, but it’s not free for firms or enterprises. They have to pay for it uses and price is decided by the scarcity. Also in modern theory of rent, rent is no longer regarded as being applicable to land only. It’s a surplus which arises at any factor of production, the supply of which is fixed. According to them, the Ricardian theory of rent is too closely related to land. This creates an impression that rent is a peculiar earning of land only. The fact, however, is that other factors of production i.e., labor, capital and entrepreneurship may also be earning economic rent. The determination of rent, the modem economists say, can be explained by market forces of demand and supply, just like the rewards or remuneration earned by other factors of production. This is because rent is the difference between the actual earnings of a factor of production and the minimum amount necessary to keep it employed in its current use. According to Modern economists, Economic rent is a surplus which arises due to difference between the actual earnings of a factor of production and the minimum amount necessary to keep it employed in its current use. Economic rent = Actual earning - Transfer earning Thus, according to the modern theory of rent, Economic rent -refers to income earned from a factor of production which is greater than the minimum necessary to bring the factor of production into its current use. Transfer earnings- refer to the minimum amount of earnings necessary to keep a factor of production in its current use, taking into account its opportunity cost or potential earnings in alternative uses. Therefore, economic rent arises when a factor of production earns more than its transfer earnings due to its scarcity or specialized nature. Demand and Supply Analysis: (A) Demand for a Factor: The demand for a factor which may be land, labor or capital is a derived demand. Land, say for instance, is demanded for its produce. The higher the produce, the
greater is the demand for land. A firm will pay rent equal to the marginal revenue productively of land. The rent diminishes as more land is used due to the operation of law of diminishing returns. The demand curve of a factor is, therefore, negatively sloped which means more land will be used only at lower rents, other things of course remaining the same. (B) Supply of a Factor: The supply of a factor is positively related to its price. This is because as the price of a factor increases, it becomes more profitable to supply it, leading to an increase in its supply. For instance, if the wage rate of labor increases, workers will be more willing to work, thereby increasing supply of labour. Similarly, if the price of land increases, landowners may be more then willing to rent out their land, leading to an increase in the supply of land. The supply curve of a factor is, therefore, positively sloped which means that more units of a factor will be supplied at higher prices, other things remaining constant. (C) Equilibrium Rent: The equilibrium rent is determined at the point where the demand for a factor equals its supply. At this point, the price of the factor is such that both buyers and sellers are satisfied. Any increase in demand for the factor will lead to an increase in its price (rent), and any decrease in demand will lead to a decrease in its price. (D) Economic Rent Depends on the Elasticity of Supply of the Factor of Production: The proportion of the income of a factor that consists of economic rent depends on the elasticity of supply of the factor of production which may be (i) perfect inelastic supply (ii) perfectly elastic supply and (iii) less than perfectly elastic supply. (E) Economic Rent: Economic rent is the difference between the actual earnings of a factor and its transfer earnings. Transfer earnings are the minimum amount required to keep a factor in its current occupation, and are equal to the opportunity cost of using the factor in its next best alternative use. Economic rent = Actual earning - Transfer earning Economic rent arises due to the scarcity of a factor in relation to its demand. In summary, the modern theory of rent explains that rent can be earned not only by land but also by other factors of production like labor and capital, and is determined by the forces of demand and supply. The equilibrium rent is determined at the point where the demand for a factor equals its supply, and economic rent is the difference between actual earnings and transfer earnings.
Perfectly Elastic Supply When the Supply of factors of production, such as land, labor, or capital, is perfectly elastic, it means that there is an unlimited supply of the factor available and that the price of the factor does not change with changes in demand. This means that the supply curve is horizontal, and any increase in demand for the factor will not result in an increase in its price. In this case, there will be no economic rent earned by the factor of production. The actual earning and transfer earning will be equal, as there is no scarcity of the factor and the market price will be equal to the minimum amount necessary to keep the factor employed in its current use. In otherwords, when the supply of a factor of production is perfectly elastic, then none of its income is economic rent. Its entire income is transfer earnings. For example, consider unskilled labor in a labor market with a large pool of available workers. If the demand for unskilled labor increases, the supply of labor can easily respond, and the wage rate for unskilled labor will remain constant. In this case, there will be no economic rent earned by unskilled labor, and the actual earning will be equal to the transfer earning. Perfect Inelastic Supply In the case of perfectly inelastic supply, the supply of the factor cannot be increased or decreased in response to changes in its price. An example of a factor with perfectly inelastic supply is unique and specialized talent, such as a highly skilled surgeon in a particular location, a highly specialized and experienced economics professor to teach a course, a famous singer or athlete. In this case, the entire economic rent accrues to the factor owner, as there is no possibility for competitors to enter the market and offer a substitute factor. The actual earning of the factor owner will be equal to the economic rent, as there is no transfer earning to consider. Quantity of factor Price of factor
Less than Perfectly Elastic Supply If the supply of a factor of production is neither perfectly elastic nor perfectly inelastic, then some part of the factor income is economic rent and the other part is transfer earnings.