MODERN THEORY OF RENT
According to the modern theory developed by this Joan Robinson and others rent can rise on any factor of production. i.e land,capital, labour and entrepreneurship.
- According to the modern economist every factor has level element in other words. The supply of the factors of production is not perfectly elastic and hence they earn surplus income which is of the nature of rent.
- According to Mrs. Joan Robinson, the essence of the concept of rent is conception of surplus earned by a particular part of factor of production over and the minimum necessary to include it to do its work.
- According to prof. Lip say, Economic rent is an excess over transfer earnings that a unit of the factors actually earns.
In short Economic rent = factors actual earnings – transfer earnings
That is; Economic Rent = present earning – Transfer earning
DETERMINATION OF ECONOMIC RENT
According to economic to modern theory economic rent arise due to scarcity and specificity of the factors of production.
Suppose a mechanical engineers according in Kahama gold mining get $2500 as monthly pay. If he leaves Kahama Gold mining he can get $2000. In this situation $2500 is actually earning and $2000 is his transfer earnings that is the earning of the next best job.
This Economic rent = present earning – Transfer earning
= $us 2500 – $us 2000
In other word the rent of to any factors of production will depend on its elasticity of surplus as follows;-
- If the factors is perfectly elastic, supply will earn no rent because both its actual earning and transfer earning are equal
- Present earning = SENO
- Transfer earning = SEON
- Rent under perfect inelastic. When the factor is completely specific or has only one specific use, change in price has no effect on its supply i.e even at zero prices the supply of the factor will remain the same.
Thus this factor has no transfer earning. Therefore the whole actual earning is the economic rent.
This is illustrated under the diagram below
From the diagram
Transfer earning = o
Present earning = WELO
Rent = actual earning – transfer earning
WELO – 0
- Actual earning = Rent
- Rent under relatively elastic supply.
It suggested that normally the supply of factors tend to increase with the increase in the factor price.
Thus the supply of the factor remain upward sloping comes from left to the right.
If the supply curve slope upwards all units to the left for the one being considered have lower transfer earning. Thus the total transfer earning of the units is the area below the supply curve. And the total payment (present earning) is equal to the total area.
This illustrated diagram below
From the diagram we note that;
Rent = present earning – transfer earning
RENO – SENO = Res
Rent = RES
Thus the above analysis makes it clear that the more elastic the supply curve the less.
- QUASI – RENT
The concept of quasi –rent was propounded and popularized by Prof. Marshall.
He used to explain the return of man- made produce goods the supply of which is fixed in the short period.
In a technical expression that indicates the relationship between output and the factor inputs used to produce such output.
In short production function can be written as;
Qx = f (K, L, E etc)
This can be simplified;
Qx = f ( k,l ) while l is variable and k is fixed.
TYPES OF PRODUCTION FUNCTION
- Short run production function. Some factors are fixed while other are variable ie K (capital) is fixed labour is variable.
Qy = f(k,l)
It is subjected to the law of the diminishing returns.
- Long run production function.
All the factors of production are variable. It is subjected to the law of return to scale.
Land Labour Total output 1 0 0 1 1 16 1 2 48 1 3 108 1 4 164