economic rent
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Economic Rents
2. The amount of money the owner of a property can reasonably demand in order to rent that property.
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economic rent
a money payment made for a FACTOR OF PRODUCTION that is over and above the minimum payment to keep it in its present use. This minimum payment is known as TRANSFER EARNINGS and it represents an OPPORTUNITY COST. Thus, for example, a person might just be willing to work as a lecturer for a minimum of £1,000 per month because he could earn this amount working in his ‘next best’ job as a taxi driver. If his actual earnings are £1,100 per month, then his monthly earnings would comprise transfer earnings of £1,000 and economic rent of £100. Economic rent is a surplus insofar as its payment is not necessary to ensure a supply of a particular factor of production. Fig. 54 shows the demand for, and supply of, lecturers at the prevailing market wage rate (OW), which is equal to, say, £1,100 per month, enough to induce sufficient lecturers (OQ) to offer themselves to work and meet the demand for their services (D). At this wage rate, the last (marginal) people offering their services as lecturers will only do so for £1,100 per month, since this is the amount they could currently earn elsewhere as, say, driving instructors. However, since all lecturers of a common grade would be paid the same per month, an intra-marginal lecturer (Q1,) would be paid wage rate OW even though he would have been prepared to work as a lecturer for a smaller wage (OW1). The economic rent of the intra-marginal lecturer is equal to WW1. Total transfer earnings in the figure are equal to the diagonally shaded area below the supply curve, and economic rent is equal to the vertically shaded area above the supply curve.The economic rent earned by a factor of production depends essentially upon the demand for the products made with that factor and thus the DERIVED DEMAND for that factor. Thus, for example, if the demand for lecturers was to rise from D to D1 in Fig. 54, then in order to induce more people to enter lecturing and thus increase the supply of lecturers to OQ2, wage rates would need to rise to OW2. This would mean that existing lecturers such as Q1 would now earn a higher wage rate and secure a larger economic rent (W1W2). By contrast, if the demand for lecturers falls, then so will their wage rates, with some lecturers transferring to better-paid employments whilst those remaining earn wages much closer to their transfer earnings.
The effect of demand upon transfer earnings and economic rent will depend upon the PRICE-ELASTICITY OF SUPPLY of a factor of production. If the supply curve for a factor is comparatively price-elastic, then most of the factor earnings would take the form of transfer earnings and little economic rent would accrue - for example, the market for unskilled labourers. In the extreme case of a horizontal supply curve for a factor of production that is in perfectly price-elastic supply, then all the earnings would be transfer earnings and no economic rent would accrue. By contrast, if the supply curve for a factor is comparatively price-inelastic, then most of the factor earnings would take the form of economic rent - for example, the market for sports champions and pop music entertainers. In the extreme case of a vertical supply curve for a factor of production that is in perfectly price-inelastic supply, then all the earnings would be economic rent.
Some factors of production may be in relatively price-inelastic supply in the short run but more elastic-supply in the long run, and thus may earn ‘temporary’ economic rents until supply is able to adjust fully to demand. The economic rents accruing to such factors of production are termed quasi-rents’, and they tend to disappear in the long run as supply catches up with demand. For example, in the case of particular types of work where a lengthy training period is required, a sudden increase in the demand for such work would enable persons already possessing the appropriate skills to secure large quasi-rents through high wage rates.