Basically, rent is the payment for land. Economic rent is any payment over and above a factor's transfer earnings. Transfer earnings is the minimum amount of reward necessary to maintain a factor of production in its present occupation i.e. to prevent it from transferring to another alternative occupation or use. It is also called the supply price of a factor of production. Therefore, economic rent is calculated as actual earnings minus Transfer earnings.

E.R = A.E - T.E

ER-Economic rent

A.E - Actual earnings

T.E - transfer earnings.

Example;

An accountant earns 800,000/= per month. His transfer earnings is 500,000/= calculate his economic rent.

E.R = A.E - T.E

Therefore E.R = 800.000- 500.000

E.R. = 300,000.=

Figure 1.10

NOTE: Economic rent is mostly earned by a factor of production whose supply is perfectly inelastic but its demand elastic. This is what is called true economic rent e.g land.

Quasi rent:- This is a special kind of economic rent which refers to the surplus earnings received by a factor of production which has elastic supply in the longrun and perfectly inelastic supply in the shortrun e.g lawyers.

Commercial rent

It is the payment made for use of durable goods and assets like vehicles, video sets, houses etc. It is a hire price for a durable asset.

Note: Fixed factors of production:- These are factors of production which do no change with the level of output e.g. land or capital in the shortrun.

Variable factors of production:- Are factors of production which change with the level of output. Increase in output in the shortrun may result from an increase in the variable factor e.g. labour.

illustration of economic rent and transfer earning

(i) Perfectly elastic supply, 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.

In the Fig., the supply curve SS is a horizontal line. Whatever; the amount of factor demanded, the supply price remains at OS. Hence, it earns no surplus in the nature of rent.

(ii) Totally inelastic supply, When the supply of a factor is totally inelastic, then its transfer earnings is zero. The entire income is economic rent.

In the figure, the elasticity of the supply of factor of production is zero. It does not increase at all as its demand increases. The supply curve is vertical. The entire of factor income is a surplus which is shown by area ONST.

(iii) Less than perfectly elastic supply. if the supply of a factor of production is neither perfectly elastic nor perfectly inelastic as illustrated in figure, then some part of the factor income is economic rent and the other part is transfer earnings.

In Figure, the supply curve SS of a factor, say labour, is positively sloped. A firm must pay at least OS price to attract OL units of labour to the given use. If supply of a factor is to rise, the factor must be paid higher and higher wages to attract more units. The demand curve OO (measuring the marginal revenue product of the labour) interests the supply curve at point R.

Now at OT equilibrium price, Quantity of the Factor ON units of labour are demanded and supplied. Since all the units of the Fig. factor up to ON are paid the market price OT, the intra marginal units earn surplus above their supply price. The marginal unit i.e., Nth is not getting any rent. Here the total income of the factor is equal to the area OTRN, It is made up of its economic

Transfer Earning:

Transfer earning or opportunity cost is the amount which a factor of production could earn in its next best alternative use. In other words, it is the amount that a factor must earn to remain in its present occupation. For example, suppose a doctor earns Ug.Shs 3,000,000 per month from his private clinic. The alternative available to him is to serve in a hospital as an employee where he could earn Ug.Shs 1,800,000 per month. Thus, the doctor's transfer earning is Ug.Shs 1,200,000 per month. He must earn a minimum of Ug.Shs 1, 800,000 to remain in his private practice. Transfer earning is the same as supply price of a factor of production.

(iv) Quasi Rent:

Quasi-rent refers to the whole of the income which some agents of production earned during the short period when their supply cannot be increased in response to an increase in the demand for them. It is not pure rent, because the supply of factor can be increased in the long run and quasi-rent disappears. It is the payment to a factor of production or the earning of a factor which are economic rent in the short run and turns into transfer earning in the long run. This occurs when the factor has a relatively inelastic supply in the short run but elastic supply in the long run. Quasi-rent may also be defined as the excess of total revenue (TR) earned in the short-run over and above the total variable costs (TVC). Thus, Quasi-rent = TR - TVC.

(v) Scarcity Rent:

Land is limited in quantity and with the growth of population it becomes scarce in relation to the demand for it. As the price of the agricultural produce (e.g. wheat) rises, the worst land is also subjected to intensive cultivation and it yields a surplus over cost. This surplus is not a differential one compared to no-rent land, which does not exist. It is due to the scarcity of land as such. Hence, it is called scarcity rent.

(vi) Differential Rent: Different pieces of land are not uniform in quality. Hence, with the increase in population successive inferior lands are taken into cultivation. In the process rent immediately arises on the better quality lands. The amounts of rent certainly depend on the ,difference of productive powers of these various grades of land. The marginal land gets no rent at all. Thus, rent arises on account of natural differential advantages enjoyed by a piece of land over the marginal land. The natural differential advantage may be due either to superior quality of land or its better situation. This is Ricardo's theory of differential rent.