E-LESSON-10 MICRO ECONOMICS-1 ENG

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B.A.English 2 All right are reserved with CU-IDOL Microeconomics-I Course Code: BAQ108 Semester: First e-Lesson: 10 SLM Unit: 10 www.cuidol.in Unit-10(BAQ108)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION Students will be able to develop In this Unit you are going to understanding about the rent,intrests understand the basic concept and profit. of Rent, Interest, and Profits Students will be able to explain Under this you will be able to Ricardian Theory of Rent . explain various theories of Rent Students will be able to describe Rich and Uncertainty Theories of Profit. www.cuidol.in Unit-10(BAQ108) INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL

TOPICS TO BE COVERED 4 Concept of rent and Quasi-Rent The Ricardian Theory of Rent Modern Theory of Rent  The Meaning of Interest(Gross and Net Interest) The Classical Theory of Interest The Concept of Profit(Gross Profit and Net Profit) Dynamic Theory of Profit Risk and Uncertainty-Bearing Theory of Profit www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Contract Rent 5 Contract rent is a commercial rent referring to a periodical payment for the use of something. It is a rental income. It is the price paid per unit of time (say, monthly or yearly, for instance) for the services of a durable good, such as land, house, machine, car, furniture, computer, etc., when hired rather than purchased outright. Thus, the rent of a house, the rent of car, the rent of a piece of land, the rent of a television set, the rent of a VCR, etc., are contract rents. These are referred to as “rents’ or ‘rentals’. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Economic Rent 6 Economic rent is a differential surplus. According to Ricardo, economic rent is the surplus of the yields of super-marginal or more fertile land over the yields of the marginal or the least fertile land. To him, economic rent is a true surplus which is paid to the landlord for the use of natural utility — the productive powers of the soil. Economic rent is defined as any excess of payment made to a factor of production over and above what is necessary to keep it in its current activity. Transfer earning is the supply price of the factor measured in terms of its opportunity costs. Thus, transfer earnings are what the particular factor could earn from its next nest alternative use. Thus, transfer earnings are the minimum which must be paid to a unit of a factor to retain it in its present activity or use. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Quasi-Rent 7 Alfred Marshall originated the concept of quasi-rent, which refers to the short-run earnings of some factors of production, especially capital, such as machines and other man-made instruments of production that are in fixed supply during a short period. \"Quasi-rent is, thus, a temporary gain which is earned by a factor of production due to the temporary limitation of its supply\". www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Ricardian Theory of Rent 8 David Ricardo, an English classical economist, first developed a theory in 1817 to explain the origin and nature of economic rent. Ricardo defined rent as, “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil. In his theory, rent is nothing but the producer’s surplus or differential gain, and it is found in land only. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Assumptions of the Theory: 9  Rent of land arises due to the differences in the fertility or situation of the different plots of land. It arises owing to the original and indestructible powers of the soil.  Ricardo assumes the operation of the law of diminishing marginal returns in the case of cultivation of land. As the different plots of land differ in fertility, the produce from the inferior plots of land diminishes though the total cost of production in each plot of land is the same.  Ricardo looks at the supply of land from the standpoint of the society as a whole.  In the Ricardian theory it is assumed that land, being a gift of nature, has no supply price and no cost of production. So rent is not a part of cost, and being so it does not and cannot enter into cost and price. This means that from society’s point of view the entire return from land is a surplus earning. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Reasons for Existence of Rent: 10 1)Scarcity Rent: Ricardo assumed that land had only one use—to grow corn. This meant that its supply was fixed, as shown in Figure . Hence the price of land was totally determined by the demand for land. In other words, all the price of a factor of production in perfectly inelastic supply is economic rent—it has no transfer earnings. Thus, it was the high price of corn which caused an increase in the demand for land and a rise in its price, rather than the price of land pushing up the price of corn . In the real world a particular piece of land can be put to many different uses. This means its supply for any one use is elastic, so that it has transfer earnings. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Differential Rent: 11 According to Ricardo, rent of land arises because the different plots of land have different degree of productive power; some lands are more fertile than others. So there are different grades of land. The difference between the produce of the superior lands and that of the inferior lands is rent—what is called differential rent. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Explanation 12 Ricardo assumes that the different grades of lands are cultivated gradually in descending order—the first grade land being cultivated at first, then the second grade, after that the third grade and so on. With the increase in population and with the consequent increase in the demand for agricultural produce, inferior grades of lands are cultivated, creating a surplus or rent for the superior grades. The total cost is the same for each plot of land. Let us assume that the order of cultivation reaches the third stage when all the three plots of land of different grades are cultivated and the market price has come to the level of Rs. 5 per kg of wheat. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The concept of differential rent arising due to differences in the 13 fertility of different plots of land is illustrated in Fig. All right are reserved with CU-IDOL Here, AD, DG and GJ are three separate plots of land of the same size, but of difference in fertility. The total produce of AD is ABCD, that of DG is DEFG and that of GJ is GHIJ. The first and second plots of land generate a surplus shows by the shaded area, which represents the rent of the first two plots of land. Since the third plot GJ has no surplus it is marginal land or no- rent land. Grade 4 (below-marginal) land will not be cultivated, because rent is negative (Rs. 25 in this example) www.cuidol.in Unit-10(BAQ108)

Rent and Price: 14 From the Ricardian theory we can show the relation between rent (of land) and price (of wheat). Since the market price of wheat is determined by costs of the marginal producer and since, for this marginal producer, rents are zero, Ricardo concluded that economic rent is not a determinant of market price. Rather, price of wheat is determined solely by the market demand for wheat and the availability of fertile land. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Deductions from the Theory: 15  Ricardo considers land as fixed in supply. Of course, land is fixed in an absolute sense. But land has alternative uses. So the supply of land to a particular use is not fixed (inelastic). For example, the supply of wheat land is not absolutely fixed at any given time.  Ricardo’s order of cultivation of lands is also not realistic. If the price of wheat falls the marginal land need not necessarily go out of cultivation first. Superior grades of land might cease to be cultivated if a fall in the price of its output causes such land being demanded for other purposes (e.g., for constructing houses).  The productivity of land does not depend entirely on fertility. It also depends on such factors as position, investment and effective use of capital.  Critics have pointed out that land does not possess any original and indestructible powers, as the fertility of land gradually diminishes, unless fertilisers are applied regularly.  Ricardo’s assumption of no-rent land is unrealistic as, in reality; every plot of land earns some rent, although the amount may be small.  Ricardo restricted rent to land only, but modern economists have shown that rent arises in return to any factor of production, the supply of which is inelastic.  According to Ricardo, rent does not enter into price (cost) but from the point of view of an individual farm rent forms a part of cost and price. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Modern Theory of Rent 16 The modern theory of rent is a mixture of new ideas and views, as well as modifications, amplifications, and refinements in the Ricardian theory of rent presented by a host of modern economists like Marshall, Joan Robinson and Boulding. The gist of modern economists’ views on the theory of rent lies in the following propositions. 1. Rent arises due to scarcity of land. 2. Rent is a generalised surplus earned by all factors. 3. Rent as a surplus, earned by a factor, is measured with reference to transfer earnings of the factor in its prevailing employment. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Modern Theory of Rent 17 According to the modern theory of rent, the rent of a factor, from the point of view of any industry, is the difference between its actual earnings and transfer earnings. Rent = Present Earnings - Transfer Earnings. Transfer earning refers to the amount of money, which a factor of production could earn in its next best- paid use (opportunity cost). www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Meaning of Interest 18 In economics, Interest has been defined in a variety of ways. Commonly, Interest is regarded as the payment of the use of service of capital. As Prof. Marshall has said – “The payment made by borrower for the use of a loan is called Interest.” In other words, Interest is the reward for the yield of capital, of saving, for the foregoing of liquidity and the supply of money. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Types of Interest: 19 There are two types or kinds of Interest: 1) Net Interest: According to Prof. Marshall, “Net Interest is the earnings of capital simply or the reward of waiting simply.” Thus, Net Interest = Gross Interest – (payment for risk + payment for inconvenience + cost of administering credit) i.e., Net Interest = Net Payment for the use of capital. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

(2) Gross Interest: 20 Gross Interest according to Briggs and Jordan has said—“Gross Interest is the payment made by the borrowers to the lenders is called Gross Interest or Composite Interest.” It includes payments for the loan of capital payment to cover risks for loss which may be: (i) A personal risks or (ii) Business risks, payment for inconveniences of the investment and payment for the work and worry involved in watching—investments, calling them in and investing. Gross Interest = Net Interest + payment of risk + payment for inconvenience + cost of administrating credit www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Elements of Gross Interest: 21 Gross interest includes, besides net interest or pure interest, the following elements: 1. Compensation for Risks: Giving a money loan to somebody always involves a risk that the borrower may not repay it. To cover this risk, the lender charges more, in addition to the net interest. Thus, when loans are made without adequate security, they involve a high element of risk, so a high rate of interest is charged. 2. Compensation for Inconvenience: A lender lends only by saving, i.e., by restricting his consumption out of his income which obviously involves some inconvenience which is to be compensated. A similar inconvenience is that the lender may not be able to get his money back as and when he may need it for his own use. Hence, a payment to compensate his sort of inconvenience may be charged by the lender. Thus, the greater the degree of inconvenience caused to the lender, the higher will be the rate of interest. 3. Payment of Management Services: A lender of capital funds has to spend money and energy in the management of credit. For instance, in the lending business, certain legal formalities have to be fulfilled, say, fees for obtaining moneylender’s licence, stamp duties, etc. Proper accounts must be maintained. He has to maintain clerical staff as well. Thus, for all such sort of management services, reward has to be paid by the borrower to the lender. Hence, gross interest also includes payment for management expenses. 4. Compensation for the Changing Value of Money: When prices are rising under inflationary conditions, the purchasing power of money declines over a period of time and the creditor loses. To avoid such loss, a high rate of interest may be demanded by the lender. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

To sum up: 22 Net Interest = Net Payment for the use of capital. Gross Interest = Net Interest + Payment for risk + Payment forVmanagement services + Compensation for the changing value of money. Usually, the net rate of interest is the same everywhere. In economic equilibrium, the demand for and supply of capital determine the net rate of interest. But, in practice, gross interest rate is charged. Gross interest rates are different in different cases at different places and different times and in the case of different individuals. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Loanable Funds Theory of 23 Interest According to Dennis Roberston and neo-classical economists this price or the rate of interest is determined by the demand for and supply of loanable funds. The market for loanable funds consists of arrangements and procedures to carry out transactions between people who want to borrow money and people who want to lend money. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Demand 24 The demand for loanable funds originally from two basic units of the economy, viz., consumers and business firms, (a) Consumers demand loanable funds because they prefer current goods to the same amount of future goods. consumers’ point of view, interest is the cost of easier and earlier availability of goods. (b) Business firms or investors demand loanable funds because they are a form of capital (i.e., money capital). Capital is demanded because it is productive. Investors demand loanable funds so that they can invest in capital goods and finance roundabout methods of production. The amount of loanable funds demanded varies inversely with the rate of interest. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Supply: 25 Even though higher interest rates lead to a fall in the amount of borrowing by consumers and investors, they encourage lenders to make a larger volume of funds available to the market. A rise in the rate of interest increases the quantity of future goods available to people willing to sacrifice current consumption. Due to the increase in the quantity of future goods that can be acquired for each rupee supplied the supply curve of loanable funds slopes upward from left to right. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Interest Rate Determination: 26 In Fig. the demand curve for loanable funds intersects the supply curve at point E and the equilibrium rate of interest (8%) is automatically determined (by market forces). The interest rate (8%) brings the plans of borrowers in harmony with the plans of lenders. In equilibrium, the quantity of funds demanded by borrowers is equal to the amount supplied by lender (Rs. 250 crores) as Fig. 2shows. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Criticisms of the Loanable 27 Funds Theory:  The classical writers noted the effect of money as the rate of interest through the saving-interest process. Hence the loanable funds theory is not a new theory.  Secondly, the loanable funds theory ignores certain real forces exerting influence on the rate of interest such as the marginal productivity of capital, the abstinence, and time preference.  In most modern economies, the rate of interest is not determined by the market forces, i.e., by the forces of demand and supply. Instead, it is the determined largely by institutional forces, i.e., by the policies and actions of the central bank and the government. Their policies exert the most important influence on the .rate of interest by determining both the demand for and supply of loanable funds in the country www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

To Sum Up 28 1. Firstly, it appeals to common sense. 2. Secondly, it is related to money. 3. Thirdly, it gives due recognition to the role played by the banking system in the determination of interest. 4. Fourthly, due importance is assigned in this theory to demand for cash balances for precautionary and speculative purposes. 5. Finally, it admits the fact that the volume of saving is positively related to the level of income. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Definition of Profit: 29 Profit is a basic concept in market economy. Profit acts as an incentive mechanism for business investment. Higher profits provide incentives for business growth. Profit also acts as an automatic signal for the allocation and reallocation of scarce resources. Profit which is the hub of all economic activities has no precise definition of its own. In fact it is the most controversial topic of economic theory. To get an accurate idea of profit, it is necessary to first distinguish gross profit from net profit. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Concept of Profit 30 Profit is the reward earned by an entrepreneur for his contribution to the process of production. The concept of profit entails several different meanings: 1. Profit may mean the compensation received by a firm for its managerial function. It is called ‘normal profit’ which is the minimum sum essential to induce a firm to remain in business. 2. Profit may be looked upon as a reward for the true entrepreneurial function. It is the reward earned by the entrepreneur for bearing risks. It is termed as supernormal profit for analytical reasons. It is also a functional reward. 3. Profit may imply monopoly profit. It is earned by a firm through extortion because of its degree of monopoly power in the market. It is not related to any useful, specific function. Thus, monopoly profit is not a functional reward. It is, therefore, socially unjustifiable. 4. Profit may sometimes be in the nature of a windfall. It is an unexpected reward earned by a firm just by a mere chance, say, like an inflationary boom. 5. Profit covers all non-labour income and implicit returns. In economic theory, profit usually means this functional earning of an entrepreneur. Thus, normal and supernormal profits are important concepts. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Nature of Profit 31 Profit is the earning of an entrepreneur. To the economist, the most significant point about profit is that it is a residual income. However, the term ‘profit’ has different connotations in the accounting sense and in the economic sense. In the accounting sense, when total cost is subtracted from total revenue or total sales receipts of the firm, the residual is termed as profit. Thus, Profit = Total Revenue – Total Cost. In the economic sense, when the total costs are measured, we include explicit as well as implicit costs. Implicit costs refer to costs which are to be deemed and imputed as costs when a firm uses its own capital, for which obviously no interest is payable to anybody. Similarly, the entrepreneur provides managerial service for which he does not receive any remuneration by way of salary. In a true economic sense, therefore, implicit and explicit rents are included in the cost of production. Hence: Profit = Total Revenue – Total explicit and implicit costs. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The distinctive features of 32 profit 1. It is not a predetermined contractual payment. 2. It is not a fixed remuneration. 3. It is a residual surplus. 4. It is uncertain. 5. It may even be negative. Other factor rewards are always positive. 6. It is widely fluctuating, while other factor incomes are generally stable over a period of time. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Definition of Gross Profit: 33 Gross profit is the surplus which accrues to a firm when it deducts its total costs in producing products from its total income received from the sale of goods. In producing goods, a firm incurs explicit costs and implicit costs. In the ordinary language, the term profit is used in the sense of gross profit. Formula For Gross Profit Gross Profit = Total Revenue - Total Explicit Costs www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Elements and Example of Gross 34 Profit: (i) Explicit costs: A firm's explicit costs are the actual cash payments it makes to those who provide resources. For example, rent is paid on land hired, wages are paid to the employees, interest is paid on capita!. In addition to this, a firm also pays insurance premium, and taxes and sets aside depreciation charges. (ii) Implicit costs: Implicit costs are the opportunity costs of using resources owned by the firm or provided by the firm's owners. To the firm, the implicit costs are the money payments that self employed resources could have earned in their best alternative uses. For example, you are working as a manager in a shoe factory and getting Rs.30000 per month as salary. Now you establish your own firm. You must include your salary of Rs.30000, while calculating cost. Implicit costs include (a) rent on entrepreneur's own land (b) interest on his own capital (c) wage of the entrepreneur which he could earn in alternative occupation. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Definition of Net 35 Profit: Net profit is the profit which accrues to an entrepreneur for his functions as an entrepreneur. These functions include risk bearing ability, innovating spirit, bargaining ability etc. Net profit is the reward of an entrepreneur for (i) organizing a business and undertaking risk (ii) his bargaining ability with the customers (iii) adopting new techniques of production (iv) monopoly gains if any (v) windfall gains due to sudden rise in the prices of goods. Formula For Net Profit: Net Profit = Total Revenue - (Total Explicit Costs + Total Implicit Costs) www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Dynamic Theory of Profit 36 J.B. Clark originated the ‘Dynamic Theory of Profit’. In his view, dynamic changes in the economy should be regarded as the fundamental cause of the emergence of profits. Clark defines profit as the difference between selling price and costs resulting on account of changes in demand and supply conditions. Briefly, profit is the surplus over costs. According to Clark, the following ‘general’ changes cause profit to emerge: 1. Increase in population; 2. Changes in tastes and preferences; 3. Multiplication of wants; 4. Capital formation; 5. Technological advancement; and 6. Changes in the form of business organisation. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Risk-Bearing Theory of 37 Profit Prof. Hawley who categorically attributed profit to the compensation payable to the entrepreneur for his risk- bearing function. To Professor Hawley, since the entrepreneur undertakes the risks of the business, he is entitled to receive profit as his reward. In fact, the chance to make a profit induces businessmen to run the risk of loss. If there is no hope for substantial profit, no one will be willing to risk money by investing it in a business. Profits are commensurate with risks. The more risky the business, the higher is the expected profit rate. The following criticisms have been levelled against the risk theory: 1. There can be no functional relationship between risk and profit. Those who undertake high risks in certain business may not necessarily earn high profits. 2. To some critics, like Carve, profit is based not on the entrepreneur’s ability to undertake the risks of business, but rather on his capability of risk-avoidance. 3. The theory disregards many other factors attributable to profit and just concentrates on risks. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

The Uncertainty-Bearing 38 Theory of Profit According to Prof. Knight, profit is the reward to the entrepreneur for uncertainty-bearing. Profit is earned by the entrepreneur when he is capable of making successful decisions about the business under conditions of uncertainty owing to dynamic changes. Knight defines pure profit as “the difference between the returns actually realised by the entrepreneur and the competitive rate of interest of interest on high-class gilt-edged securities.” According to Knight, pure profits are linked with uncertainty and risk-bearing. He, however, classifies risk into: (i) insurable risks, and (ii) non-insurable risk www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Insurable risks and non- 39 insurable risks  Insurable Risks- insurable risks are risks in which the insurance provider can calculate potential future losses or claims.  Non-insurable risks are risks which insurance companies cannot insure because the potential losses or claims cannot be calculated. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Implication of Knight Theory 40 It In short, Knight’s theory implies that: 1. Profit is the reward for uncertainty-bearing. 2. The unmeasurable risks are termed as uncertainty. These unmeasurable risks are true hazards of business. 3. Pure profit is, however, a temporal and unfixed reward. It is tuned to uncertainty. Once the unforeseen circumstances become known, necessary adjustment would be possible. Then, pure profit disappears. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Criticisms 41 1. Knight’s theory has been criticised on the following counts: 2. In fact, it is business ability rather than atmosphere of uncertainty which leads to a high reward of profit. 3. Knight fails to distinguish between ownership and control in modern joint-stock companies, where shareholders are the owners but business control is in the hands of salaried managers. The concept of profit and entrepreneurial function in such cases is not suitably exposed by the theory. 4. The theory does not suit well to expose the phenomenon of monopoly profit, when there is least uncertainty involved in a monopoly business. 5. Above all, the uncertainty element cannot be quantified to impute profit. To sum up: “the modern theory of profit regards the entrepreneur’s contribution to the process of production as that of bearing non-insurable risks and uncertainties.” www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Summary 42  Economic rent is a surplus which is not peculiar to land alone. It can be a part of income of labour, capital, entrepreneur.  Ricardian Theory of Rent:“that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” In his theory, rent is nothing but the producer's surplus or differential gain and it is found in land only.  Gross and Net Interest –Gross Interest is the total amount exclusive of deductions. Net is the total amount received after subtracting deductions from the gross amount.  Gross profit is the surplus which accrues to a firm when it deducts its total costs in producing products from its total income received from the sale of goods. Gross Profit = Total Revenue - Total Explicit Costs.  Net profit is the profit which accrues to an entrepreneur for his functions as an entrepreneur. These functions include risk bearing ability, innovating spirit, bargaining ability etc. Net Profit = Total Revenue - (Total Explicit Costs + Total Implicit Costs) www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Frequently Asked Questions 43 Q1. Distinguish between gross interest and net interest. Answer: Gross interest is the annual rate of interest to be paid on an investment, security, or deposit account before taxes or other charges are deducted. Gross interest is expressed as a percentage and is the opposite of net interest, which is the rate of interest after taxes, fees and other costs are deducted. Q2. Difference between Rent and Quasi-Rent . Answer: Rent arises from land and other free gifts of nature whereas the quasi-rent arises from the man- made capital equipment, Rent arises both in short and long-period whereas the quasi-rent arises only in the short-period, Rent is permanent whereas quasi-rent is temporary, Rent is an unearned income whereas quasi-rent is an essential payment, Rent cannot be zero whereas quasi-rent can be zero, Rent is associated with Prof. David Ricardo whereas quasi-rent is associated with Prof. Alfred Marshall. Q3. Critically examine Ricardian theory of rent. Answer: Ricardo defined rent as, “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” In his theory, rent is nothing but the producer’s surplus or differential gain, and it is found in land only. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Multiple Choice Questions 44 1. Rent is the reward for : (a) Land (b) Labour (c) Capital (d) Farmer 2. Economic Rent is : (a) A different supply (b) Farmer’s reward (c) Landlord chance (d) None of these 3. Rent arises due to : (a) scarcity on land (b) Ownership right (c) Government prescriptio (d) People ready to pay Answers: 1.(a) 2.(b) 3.(a) www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

Multiple Choice Questions 45 4. Quasi Rent : (b) Delayed payment of rent (a) s short-run temporary surplus earning (d) None of these (c) Permanent TR 5. Interest is the price of : (b) Business (a) Capital (d) All of these (c) Bank balance Answers: 4.(b) 5.(a) www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

REFERENCES 46 1. Ahuja, H.L.(1999). Advanced Economic Theory. New Delhi: S.Chand&Co. 2. Chopra,P.N.(1998). Micro Economic Theory and Welfare Economics. New Delhi: Kalyani Publishers. 3. Chopra,P.N.(2006). Advanced Economic Theory. New Delhi: Kalyani Publishers. 4. Lekhi, R.K., Walia, H.S. & Talwar,S.J.(2003).Micro Economics. New Delhi: Kalyani Publishers. 5. Lipsey,R.G. & Chrystal, K.A.(2004). Economics. New Delhi: Oxford University Press. 6. Mandal,R.K.(2007). Micro Economics Theory. New Delhi: Atlantic Publishers. 7. Ray, N.C.(1980). An introduction to Micro Economics. New Delhi: The Macmillan Company of India. 8. Salvatore,D. (2003). Micro Economics: Theory & Applications. New York: Oxford University Press. 9. Singh,M. (1971). MangSidhant Ate Mishrat Arth-VivsthaVich Arthik Ganana. Patiala: Punjabi University. 10. Vohra, P.& Mehta,R. (2007). Micro Economics. New Delhi: Commonwealth Publishers. www.cuidol.in Unit-10(BAQ108) All right are reserved with CU-IDOL

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