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Economic rent
#2-1-3-economic-rent #2-1-types-of-profit-measures #cfa-level-1 #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical supply curve) and market price is higher than what is required to bring the resource or good onto the market and sustain its use. Demand determines the price level and the magnitude of economic rent that is coming from the market.
Exhibit 1 shows it.
P1 is the price level that yields a normal profit to the business that supplies the item.
When demand increases from Demand1 to Demand2, price rises to P2, where at this higher price level economic rent is created.
The amount of this economic rent is calculated as (P2 – P1) × Q1. The firm has not done anything internally to merit this special reward: It benefits from an increase in demand in conjunction with a supply curve that does not fully adjust with an increase in quantity when price rises.
Exhibit 1 shows it.
P1 is the price level that yields a normal profit to the business that supplies the item.
When demand increases from Demand1 to Demand2, price rises to P2, where at this higher price level economic rent is created.
The amount of this economic rent is calculated as (P2 – P1) × Q1. The firm has not done anything internally to merit this special reward: It benefits from an increase in demand in conjunction with a supply curve that does not fully adjust with an increase in quantity when price rises.
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