Economic Rent

Business, Legal & Accounting Glossary

Definition: Economic Rent

Full Definition of Economic Rent

Economic rent is a measure of money received by owners of factors of production for its use. Land, labour and capital are primary factors of production. Economic rent is minimum monetary compensation that has to be offered to an owner of a factor of production, for use of that asset. For instance, with labour, economic rent is equivalent to its reservation wage. [It is that minimum wage amount, which a person needs to work].

Economic rent is distinct from the concept of profit, rather it encompasses the concept of ‘opportunity cost’. If opportunity costs are totally ignored then economic rent of a factor of production is its revenue less costs.

Economic Rent: Land

Land is a natural resource, which has a fixed supply. Perfectly inelastic supply is a special characteristic of land, which has interesting ramifications in supply-side market conditions for determination of rent. Land is devoid of any production cost. Hence demand is solely responsible for determination of its quantity of rent, in this model of economic analysis. As a corollary to this proposition, it implies that factors, which lead to a change in demand for land automatically control its rent determination mechanism.

Demand for land in its turn is affected by the following factors.

  • Price of produce of land
  • Productivity of land
  • Prices of other factors of production used in conjunction with land, for production

From this point of view, land rent is essentially a surplus.

Rent-Seeking Behaviour

A company or business organization is said to indulge in rent-seeking behaviour when it makes use of its resources to garner economic gains from others without reciprocating back any benefits to society at large. Rent-seeking behaviour of companies is exhibited in the modern-day world when they rally to form lobbies for pressurizing governments for issues like loan subsidies, tariff protection and grants. These kinds of activities do not lead to any wealth creation for social benefits. They merely lead to a redistribution of resources from taxpayers to special interest groups.

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Definition Sources

Definitions for Economic Rent are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 2nd April, 2020 | 3 Views.