Quasi Rent Earnings

Quasi Rent Earnings

Quasi-rent, the earnings of a specialized and durable factor of production in a (short-run) period during which its supply cannot be enlarged or reduced.

Originally the concept of economic rent was developed by David Ricardo to explain the payment for land as a factor contributing to production. Unlike man-made factors of production and labour itself, unimproved land could not be said to have a cost of production which had to be covered to ensure that it would be made available for production. The size of its remuneration would depend entirely on the demand for the fixed supply: even if the remuneration fell to nothing the land would still be there. It followed that the remuneration of land, called rent, could not be considered as part of the cost of production of commodities. It was essentially a surplus, the extent of which would be determined by the demand for the commodities whose production it facilitated: when this demand was high or low, the rent of land would correspondingly be high or low.

The concept was applied by Alfred Marshall to the determination of the price or payment of all specialized factors of production in the short run when their supply could not be changed. In a short-run period defined in this way, such a factor is like land in its economic characteristics, and its earnings can equally be regarded as a form of rent. But in the longer run its earnings cannot be regarded as deter-mined entirely by demand in this way because unlike land its supply will be increased or reduced according to whether resources invested in it yield a return larger or smaller than what could be earned from alternative investments of comparable risk. In the long run therefore its remuneration is determined by its supply as well as by the demand for it.

To emphasize this short-run nature of the economic rents earned by specialized factors of production, Marshall called them quasi-rents'. The short-run earnings of a firm in excess of its expenditure or outlays on wages , materials and other variable 'inputs' of factors are quasi-rents in this sense. They represent the returns attributable to the specialized 'fixed' factors employed. In the short rim they may be less or more than the minimum necessary to secure that they are eventually replaced; but in the longer period competition will tend to ensure that the earnings approximate to a 'normal' rate of return on the cost of replacing them. The essence of the distinction is still that of the original concept of rent; i.e. quasi-rents form no part of the costs that most be covered in the short run to secure the production of commodities; they form an economic surplus'.

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