Enterprise &Enterprise &Economic RentEconomic RentEnterprise &Enterprise &

Economic RentEconomic Rent

Exam Questions HLShort• 2010 Q 5 Why nb• 2010 Q 8 ROA• 2009 Q 1 Risks• 2003 Q 5• 2001 Q 2

Long• 2012 Q 3 (a) (b) (c)• 2008 Q 3 (a) (b) Ch pr ER• 2004 Q 4 (a) (c) ins risk,

unique• 1999 Q 3 (a) (b) pr, why nb• 1998 Q 8 all• 1997 Q 6• 1996 Q 3

Supply Price

• Is the minimum payment which must be made to bring a FOP into use and to maintain it in a particular employment.

• Eg. Minimum wage for labour

Transfer Earnings

• What a factor must receive to keep it in its present use and prevent it from transferring to another use.

Economic Rent(Ricardo)

• Is any payment made to a FOP above its supply price/transfer cost/earnings.

• It usually occurs when an increase in the supply of a FOP is difficult or impossible.

• ER = Payment - TE • Eg. • Footballer with superior physical

ability.• Land in a popular location

Circumstances under which a factor of production can earn it:

1. Shortage in the supply of any factor of productionIf land / labour is in short supply, its price will increase. 2. Possession of a rare skill or talentIf a person has a skill which is in great demand e.g. a professional soccer player then they can command high fees.

3 .Rent of Ability •An entrepreneur who invents a much sought after commodity may command high income.

4. Completely specific factors of productionThere is no opportunity cost in the use of an existing factor of production which is completely specific (not adaptable to other uses e.g. a railway station) . If a payment is made for the use of this specific factor then this entire payment would be economic rent as the opportunity cost is zero.

Exam Question• 2008 Q 3 (b) • Supply Price• 40,000• Economic Rent• Payment – Transfer Earnings

• 75,000 - 40,000 = 35,000

Rent of Ability• Is economic rent earned by a FOP

in the long run.• It usually applies to a entrepreneur

who has exceptional business acumen and who cannot be easily replaced.

• It is due to innate talent, natural ability.

Control of economic rent

1. Maximum price imposed• May be attempted by government

or private sector.• Put upper limits on transfer fees of

footballers? • Put upper limits on bonuses paid

to bankers?

2. Taxation• May be applied to land in certain

areas as it is not mobile. • However labour, capital &

enterprise can move to low tax countries.

3. Government intervention

• Gov can take measures to increase the supply of the factor so that economic rent can be reduced or eliminated.

• Eg. Barrister earn economic rent.• Increase the number of places in

university, increase supply, decrease economic rent.