Economics

Marshall’s Concept of Quasi-Rent in Economics

The theory of Quasi-rent in Economics

The concept of quasi-rent was introduced into economic theory by Marshall. Quasi-rent is nothing but the short-run earnings of the capital equipment like machinery, buildings etc. According to Marshall quasi-rent means, the additional income derived from man made goods like machines, trucks, ships etc., in the short run.

In the short run, the supply of man made goods like machines, ships is fixed. But the supply of these goods is not fixed in the long period. That’s why Marshall called only the short run additional earnings of capital goods as quasi-rent. Suppose, in the short run, the demand for goods produced by machines suddenly increases and then the demand for machines also increases. But it is not possible to increase the supply of machines to meet the demand for machines in the short period.

As a result, the prices of existing machines will increase. Then the owners of existing machines and other capital goods will make some additional earnings due to rise in the price of machines. According to Marshall, the additional income is so derived is called quasi-rent.

Let us take the examples of Tractors. When the demand for tractors suddenly increases, the supply of tractors cannot be immediately increased because it takes sometime to produce new tractors. Until the new tractors are produced and supplied, the existing owners will increase the price of tractors. So they get a surplus. The surplus is called quasi-rent. But after sometime when the new tractors are supplied, the price will fall and the surplus disappears.

Therefore, quasi-rent appear only in the short run and disappears in the long run. Hence, quasi- rent is short term phenomena. That is it is called temporary rent. Quasi-rent is shown in the following diagram.

SS is the supply curve of the factor in the short period. It is vertical of X axis because in the short period the supply inelastic. DD is the original demand curve. When DD was the demand, its price was OP and there was no rent. When the demand has increased to D1D1, the price increases to OP, because the supply is perfectly inelastic. Now it gets a surplus. Quasi rent is the different between OP and OP1.The area PP1RQ represents quasi-rent.

Differences between Rent and Quasi-Rent :

There are some differences between rent and quasi-rent as follows

1. The term rent is applicable to income derived from land which is a free gift of nature. But the term quasi-rent is applied to the income derived from machines and other capital goods like ships and buildings made by man.

2. Rent exist both in the short and long periods. Quasi rent exist only in the short period. It disappears in the long run.

3. Rent is dependent upon the supply of land. Quasi-rent depends upon the supply of machine etc.

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