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modern theory of rent

modern theory of rent
modern theory of rent

What are the main propositions of the modern theory of Rent. In what respect is it an improvement upon the Recardian theory. (2017)

Modern Theory of Rent

Modern theory first of all developed by the J.S.Mill. After this, it was developed by Jevons, Pareto and Jones Robinsons. 

Modern theory is that a surplus which rent is not related to alone land. Rather it involves the income part of labour, capital and entrepreneur.

Economic rent is any payment made to factors of production which are in excess of its supply price. Supply price is minimum earnings required to keep the factors in its present occupation. It is called transfer earning.

Transfer earning is that minimum earning which prevents an existing factor of production from transferring itself from one occupation to another.

DEFINITION

According to the Hague, “Rent is a payment in excess of transfer earnings.”

In other words:- Any payment is made over the excess of supply price is called Rent.

So Rent arised due to the difference between the actual earning and transfer earning.

RentActual Earning – Transfer Earning 

For Example:- If A works in a company for ₹10,000 salary. It’s a minimum salary which prevents him from transferring to another company. But if he transfers to another company, he gets ₹15,000 salary there. Then the difference between previous ( Transfer earning ) salary and actual salary ( recent earning ) is called Rent.

DETERMINATION OF RENT

So rent can be determined by the supply and demand factor of production. Which can be determined by two ways.

  • Rent of land
  • Rent as the difference between actual earning and transfer earning

( A ) Rent of Land:- According to the modern theory of rent is that which is arised due the scarcity of land. Scarcity means demand for land is more than its supply. So rent can be determined where demand for land is equal to its supply.

  • Demand for land- Land demand is a derived demand. Which means land demand occurs along with other demands. For example If agriculture products demand will be increased then demand of land will also be increased as well as vice versa. So demand for land depends upon the demand of agricultural products. As more and more land is used its marginal productivity will also go on diminishing.
  • Supply of land– Supply of land is fixed in the whole economy. As its supply is perfectly inelastic. Which means an increase in the price of land will not evoke an increase in the supply of land.

( B ) Rent as the difference between the actual earning and transfer earning

According to modern theory, rent can be a part of income for each factor of production. But these factors of rent will earn only rent when their supply is less than perfectly elastic. It can be analysed by following methods.

  • Rent When supply of a factor perfectly elastic– Supply of a factor of production perfectly elastic. Which means change in demand will be followed by corresponding change in supply. As factors are not scarce. Thus, actual rent will be equal to transfer earnings. Hence rent will not be raised here. As we know scarcity will produce rent.

For example if demand for factors increased by 10% and supply will also be increased 10% is called perfectly elastic. 

Rent (0)Actual Rent = Transfer Rent
  • Rent when supply of factors is perfectly inelastic– which means change in demand will not be followed by corresponding change in supply. As factors are scarce and supply for it will be fixed. Hence transfer earning will be zero.

Actual Rent = Rent

For example if demand for factors is increased from 10% to 20% and 20% to 30% but supply of factors is fixed as 10% is called perfectly inelastic.

  • Rent when supply of factors is less than perfectly elastic– Perfectly elastic is that when increase in the demand is followed by less than increase in supply of factors. It means demand for factors is increasing but corresponding to it, supply of factors is not increasing in the same proportion as is called less than perfectly elastic.

For example if demands of factors increasing 15% but supply increasing its corresponding 10% is called less than perfectly elastic.

Conclusion:-

  • Rent can be a part of the income of all factors of production in the modern theory of rent.
  • Amount of rent depends upon the difference between actual earning and trantransferring.
  • Rent arises when supply of the factors is either perfectly inelastic or less elastic in the modern theory of rent.

Recardian Theory of Rent

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Modern theory of rent
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