Rent is?

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

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

3. 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

4. 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”

5. 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

6. 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

7. Gross revenue from sale of widgets . . . . . . .$10,000 Cost of inputs (factors of production) . . . . . . . . 8,500 Net revenue . . . . . . . . . . . . . . . . . . . . . . . 2,000 Returns to management . . . . . . . . . . . . . . 1,500 Residual (available to pay rent) . . . . . . $500 Example

8. 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.

9. 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

10. Gross revenue from sale of widgets . . . . . . .$10,000 Cost of inputs (factors of production) . . . . . . . . (8,500) Net revenue . . . . . . . . . . . . . . . . . . . . . . . 2,000 Returns to management . . . . . . . . . . . . . . (1,500) Residual (available to pay rent) . . . . . . $500 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . (400) Extra or pure profit . . . . . . . . . . . . . . . . . . $100 Example

11. 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

12. 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 Price (P) MC ATC P1 Economic Rent = (P1 - P2) *Q1 P2 Quantity Q2 Q1

13. 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

14. 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 Land Rent