Rent
According to classical Ricardian theory, rent is a ‘differential surplus’, depending upon the difference of productivity between the low grade and high grand land. In this diagram, initially the productivity on a grade land (ABNP) is greater than the productivity on B grade land (BCGM) by PKNM; this is rent in A-grade. As population increase, the C-grade land is brought under cultivation because of demand for food. Thus C become the marginal land, and accordingly the rent on A-grade increase by KLRM and the B-grade over starts earning MRSG rent; there is no rent on the marginal land i.e., the C-grand.
According to modern theory of rent, any factor can earn rent. There can rent for land, building or even machine and equipment on hire. Such rents or rentals are essentially depended on the opportunity costs of alternative use of the factor. According to this view,
Rent = Actual Earning – Transfer Earning
Transfer earning is the opportunity cost. Land fixed in one place has to transfer earning and therefore its actual earning is all rent. An engineer is currently drawing $ 25,000 per month from a job. If we do not pay him at least $ 20,000 then he will surely leave the organization. Then, he is earning a rent of $5,000 per month ($25,000 - $ 20,000). In the same way, a machine is normally available for $ 500 at rental per hour for any regular order job. Suddenly there is a rush order job and the machine is quoted as $ 550 per hour. Thus $ 50 is the rent. All these are referred rate. They are AEP illustrates the modern concepts and measure of ‘economic rent’ in the form of producer’ surplus (contrastable to consumers surplus measures the different between actual price and minimum supply price and minimum supply price of a factor. Sometimes these economic rents appear in the form of ‘supernormal profit’ in the case of a competitive firm in the industry and/or the market.
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