Concepts In Rent, Profit And Distribution

WELCOME TO YOU

I heartily welcome you to read few concepts related to "Distribution", "Rent", interest, etc. Distribution is one of the main key activity in Economics.

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Contract rent

Contract rent is the higher charge of rent for using a durable good. It doesn't include which we pay monthly such as the Electricity bill because electricity is not durable. Example,

  • Room rent   (example from our daily life)
  • Rent for using any of the  durable assets or material like vehicles.

It is a periodic rent (monthly) for using any material or good. It may be annually (per year) or even for short period less than a day. for example, rent charged for cycling for few hours. It always based on the agreements.


Economic rent

It is also called as Pure rent. It refers to the payment for using productivity of the land (Natural resources) as a reward. It is the pure rent after deducting or subtracting the elements like interest, profit, wages, depreciation from gross rent or contract rent. 

According to David Ricardo "It is surplus over cost or expenses of cultivation".


Modern rent theories

There are 3 modern rent theories in Economics. It includes:

  • Quasi-rent: Short-term or short period rent (Marshallian rent)
  • Scarcity rent: Rent to factor which supply is in scare or perfectly inelastic.
  • Transfer earning: Joan Robinson, Income earned by alternative factors (opportunity cost).


Quasi-Rent

The concept of Quasi rent was introduced by Marshall. So, It is also called as the Marshallian rent. It is the rent which is paid to manmade factors such as, Buildings, machinery, etc. This rent arises only in short period and disappears in the long period.

Scarcity rent

It was introduced by Marshall while explaining the concept of supply and demand. According to this concept, The rent is paid to a factor which supply is in scarce or perfectly inelastic. For example, Generally land is a factor which supply is perfectly inelastic. So, the rent paid to land is called as scarcity rent. Land is the best example of scarcity rent because land has indirect or derived demand. If there is a rapid growth in population, The demand for land increases hence there will be an increase in price of the land.

Transfer earnings

This concept was introduced by Joan Robinson. This is also called as opportunity cost of a factor. Transfer earning is the return that the factor earns in the next best alternative use. If a factor has no alternative use the transfer earnings will be zero. 

Wages

Wages are remunerations which are paid to labour for the use of physical and mental  work by him/her in production process. 
  • Physical work: works like weightlifting, driving which involves physical effort.
  • Mental work: like Teacher, adviser, etc which requires mental efforts/experience and knowledge to perform the task.

Types of wages

  • Time wages: the wages are paid according to the time. 
  • Peace wages: the wages are paid according to work done by a labourer. 
  • Money wages: wages are paid in the form of money are called as money wages. 
  • Real wages: the purchasing power of money wages are called as real wages. 

Gross interest

It is the income received by an organization/person from the borrower  by excluding principal amount is called as gross interest.
Gross Interest = Net Interest + Reward for risk taking + Reward for inconvenience + reward for management.

Net interest

Net interest is the reward for the service of the capital lone. It is the difference between For example, Net interest is paid on 
  • Government bonds
  • government loans.

Gross profit

It is the difference between total revenue and the cost of production. 
Gross profit = net profit + implicit rent + implicit wages + implicit interest + depriciation charges + insurance premium.

Net profit

It is the reward paid for organiser for his skills. 
Net profit = gross profit - (implicit rent + implicit wage + implicit interest + depreciation charges + insurance premium).
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