Rent is? The Broadway play? What you pay your landlord? An economic concept?

Contract Rent Def. - actual payments “tenants” make for their use of property owned by someone else. Owner of house Housing services Rent

Contract Rent Amount of rent for a given house is determined by –Supply factors Costs to owner to make house available for rent Other houses available for rent –Demand factors Number of families wanting to rent Amount renters can afford to pay

How much would you pay? Assume you want to earn your living making widgets. How much could you afford to pay to rent a factory building? Estimate all variable and fixed cost (VfC) except cost of “building services” “building services”

How much would you pay? – Compare costs without cost of building services included (VC + fc) to total revenue (TR) –Building Rent = TR – VC - fc –If (VC + fc) > TR then can’t afford to pay rent –So, don’t go into widget business –Building has no “widget” value, i.e. economic rent is zero

How much would you pay? Suppose TR > VC + fc Is difference enough to cover contract rent building owners want? –No – don’t go into widget business –Yes Exactly equals amount building owner wants, or Amount owner wants is less than amount by which TR > VC + fc –Widget maker gets to keep this difference

Example Gross revenue from sale of widgets $10,000 Cost of inputs (factors of production) ,500 Net revenue ,000 Returns to management ,500 Residual (available to pay rent) $500

Example Assume minimum cost to rent building is $600 (supply price), then can’t go into widget business in this building Assume minimum supply price is $500, then go into business and just breakeven Assume minimum supply price is $400, then widget maker’s profit is increased by $100.

Example Who gets (captures) this “extra” or “pure” profit? Widget maker in this example Under what circumstances would building owner get the $100? Building owner sees that widget maker is getting rich so she raises rent by $100

Example Gross revenue from sale of widgets $10,000 Cost of inputs (factors of production) (8,500) Net revenue ,000 Returns to management (1,500) Residual (available to pay rent) $500 Rent (400) Extra or pure profit $100

Economic rent Surplus of income from selling a good or service above minimum supply price it takes to bring a factor into production, i.e. pure profit –$100 in the example

Economic rent Surplus of income above the minimum supply price it takes to bring a factor into production, can also be thought of as pure profit P1P1 MC ATC Price (P) P2P2 Q2Q2 Economic Rent = (P1 - P 2 ) *Q 1 Q1 Quantity

Land Rent Economic rent when land is the factor of production analyzed Surplus of income from selling product of land above minimum supply price for land

Land Rent Total land rent may have several components –Site or soil rent - return to bare ground –Improvement rent - return to improvements like buildings –Location rent - return due to favorable location –Fertility or site quality rent - return due to productivity of soil These are the factors that would be con- sidered in a appraisal of land to determine its fair market value or fair market rent for its use