What does ‘rent’ mean in economics?

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What does ‘rent’ mean in economics?

In: Economics

2 Answers

Anonymous 0 Comments

In economics, rent is the difference between the total return of a factor of production and its supply price. The supply price is the minimum amount needed to obtain the factor’s services.

Anonymous 0 Comments

There are a few different definitions of “rent”, depending on the school of economics, but…

…generally, it’s any gains procured beyond what the market price would be due to some sort of restriction.

Basically, it’s the “unnatural” profit.

For example, if Microsoft has a de facto monopoly on operating systems, the “rent” is the amount of profit they gain *because* of their de facto monopoly, subtracting out what their profit would be otherwise.

I.e., if OSs were in a competitive market, Windows would sell for $200. Because of their market share/network effect, though, they can charge $300. That $100 is the “rent”.

If the government restricts the number of firms that can sell an item (or, usually, regulates it highly enough that only a few firms can enter the market) this makes prices higher and the price would thus be higher than it otherwise would. That difference is rent.

This applies in all sorts of ways–a guild or labor union that restricts membership is also extracting rent. If they let 4000 people in instead of 5000 and thus wages are higher, the “extra” wages they get by restricting the labor pool is also considered rent.

Patents are this as well–since the patent holder has a “monopoly” on the idea, they can charge more until the patent runs out. I can sell my left-handed monkey wrench for $60 because I’m the only producer, but once my patent runs out I can only sell it for $30 as others join the market, that extra $30 is the rent.

And so on.

The schools of thought differ greatly on what is considered “natural” which is why you might see some differences in definition.

You’ll also see the phrase “rent-seeking” especially in political economics. It basically means the government has enacted some sort of restriction (say, broadband spectrum access or zoning laws) and now different firms are trying to extract “rent” from this restriction.