Quasi Rent
Quasi Rent
Term quasi-rent (Marshallian rent) was introduced in economic theory by Marshall.
According to him, quasi-rent is the surplus earned by the instruments of production other
than land.
Refers to the income produced when the demand for products increases suddenly
Ricardo discussed the concept of economic rent in relation to land because land, in total,
has the unique characteristic of being fixed in supply, both in the short-run and in the long
run.
The concept can be applied to any factor of production because, in the short run, all
factors are fixed in supply and therefore, receive a payment in the nature of economic
rent, i.e., quasi-rent.
Quasi Rent
The distinguishing characteristic of land is the fact that its supply is perfectly inelastic to
changes in its price and therefore its earnings depend mainly upon the demand for it.
But, in the short run, the fixed capital equipment such as machinery is likewise perfectly
inelastic in supply and cost of its production is not relevant once it has been produced.
During the short period, the earnings of specialized capital equipment depend mainly
upon the demand conditions and are thus similar to land rent and have therefore been
called rent by Marshall.
Since the capital equipment is not permanently in fixed supply like land and instead their
supply is very much elastic in the long run, Marshall preferred to call their earnings in the
short period as quasi-rent rather than rent.
Quasi Rent
The quasi-rent is only a temporary surplus which is enjoyed by the owner of
the capital equipment in the short run due to the increase in demand for it
and which will disappear in the long run due to the increase in the supply
of capital equipment in response to the increased demand.
But in the long run the position regarding the supply of capital equipment
(e.g., machines) is quite different. Capital equipment are manmade
instruments of production and therefore their supply can be increased in
the long run to meet the increased demand for them. Thus, as a result of
the increase in the supply of machines, their excessive earnings will be
competed away.
Quasi Rent
• But the case of land is quite different. The supply of land being
a free gift of nature and non-reproducible, its supply is perfectly
inelastic in the short run as well as in the long run.
• Thus the surplus earnings or rent earned by land persist in the
long run also. It is thus clear that the earnings of land and of
capital equipment (machines etc.) are similar only in the short
run. The analogy between the two does not hold in the long run
because of the difference in the nature of their long-run supply.
Quasi Rent
Production of a good is possible when a fixed factor is combined with some variable factors.
The amount of variable factors used depends upon the level of output produced, while the
quantity of the fixed factor remains unchanged during the short period.
The VC must be recovered in the short run, otherwise the production would be stopped.
Whatever excess earnings over and above the TVC are made are ascribed to the machines
(i.e., fixed factor).
Therefore, quasi-rent has also been defined as the excess of total revenue earned in the
short run over and above the total variable costs. Thus,
Quasi-Rent= Total Revenue Earned – Total Variable Costs
In the long run, all costs are variable and, in long-run competitive equilibrium, total receipts
are equal to total costs (including normal profits), no excess earnings over and above the
costs will accrue to the machines and therefore no quasi-rent will be earned by the
machines.
Now suppose that the demand for the product is
such that the price OP is determined. With price
of the product OP, the price line faced by an
individual entrepreneur is PL which represents
the marginal revenue as well as the average
revenue. With price line PL, the entrepreneur is
in equilibrium at point Q and is producing OM
level of output.
Total revenue – OMQP
Total variable costs – OMEF
The area FEQP represents the surplus of TR
earned over total variable costs
(FEQP = OMQP – OMEF)
Thus FEQP is quasi-rent- short-run earnings of the machinery.
If now the demand declines so that the price falls
to OP'. With price OP', the price line is P'L' and
equilibrium is at point R with output OM'.
Now the TR earned is OM'RP' and TVC is OM'GH.
Quasi-rent is HGRP' (HGRP' = OM'RP – OM'GH).
If demand further declines and the price falls to
OP'', the price line will be P''L'' and equilibrium
position is at point S–the minimum point of the
curve AVC.
At point S, TR earned is just equal to the TVC and
the quasi-rent has thus fallen to zero.
The entrepreneur will close down production if
the price falls below OP'', for at a price below
OP'', it will not be realising fully even the variable
costs.
It is therefore clear that the quasi-rent cannot be negative.
Distinction between Rent and Quasi Rent
1. Rent is a payment for natural gifts of nature like land. QR is a payment for man made
appliances like machines.
2. As the supply of land cannot be changed, rent persists in both short run and long run. But
QR is a short run phenomenon which disappears in the long run when the supply of man
made goods is increased.
3. Rent is permanent in nature while QR is a temporary phenomenon.
4. Rent arises due to differences in fertility of land whereas QR arises due to the scarcity of
man made appliances in the short run.
5. Rent cannot be zero but QR can be zero when the short run price of the commodity
equals its average variable cost.