Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Q 
Qty 
 
Figure 4.6 
 
(iii) Long period: It is period in which supply can be adjusted 
to any extent. It is because in the long period, not only . the 
variable factors can be changed, even fixed factors like plant, 
capacity of the machine etc. can be changed. In the long period 
average total cost will have an important roll in determining the 
supply. The supply curve, therefore, in the long period will be 
highly elastic. Since, supply can be adjusted to any extent in the 
long period we can draw three kinds of supply curves cor- 
responding to 3 returns to scale in the long period. 
Check Your Progress: 
1. Discuss how the monopolist determines the price of his 
product. 

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2. State the equilibrium condition which monopolist follows to 
determine price and output. 
 
 
 
 
 
 
 
 
 
4.5 ECONOMIC RENT 
We now move on, in our discussion of the factors of 
production and their prices, to consider the rent of land. In 
colloquial English, the word 'rent' can refer to any periodic 
payment made regularly for die hire of a good. Examples are the 
rentals paid for the hire of automobiles or television sets and the 
rents paid for houses, flats, shops and the like, where these are 
not bought outright. In economic theory, on the other hand, rent 
means something different. The term is applied only to payments 
made for factors of production which are in imperfectly elastic 
supply-with land as the main example. 
The type of payment ordinarily known as rent may, of 
course, include a payment for the hire of land. The total rent of a 
house, for instance, will usually include a sum large enough to 
cover the annual value of the land on which the house stands, but 
it is a payment for other things as well. The landlord has invested 
his money in the materials of which the house is built and he 
expects a return on that investment. The 'economic' rent we shall 
discuss in this chapter takes account only of payments for the use 
of land. It excludes any return on a landlord's capital investment in 
buildings. We shall therefore ignore the problems of returns on 
investments for the moment. We shall consider them in detail in 
the next chapter. 
The kind of model which will enable us to see most clearly 
what 'economic' rent is and why it is paid is one where a tenant 
farmer rents his farm from a landowner. This is still an important 
institutional arrangement in most countries. It is also the standard 
case which was discussed for over a century by economists in 
developing the theory of rent. Of course, relations between 
landlord and tenant differ from country to country. What we are 
interested in is any payment to the landlord as owner of the land. 
This is 'economic' rent. It is sometimes described as a 
'surplus' because it does not result from any effort or activity on 
the part of the landowner. This idea that rent is a reward for the 
mere ownership of a factor of production and not a payment for 

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effort expended is both well-established and important in 
economic theory is advocated by Adam Smith.