Theory of Factor Pricing

Recardian theory of rent, Wage fund theory, Classical theory of Interest, Risk and Uncertainty bearing theories of profit

Notes

Rent

Rent is the price of the services or use of the land. E.g. rent of house, a machine, a car, etc. But in economics, it refers to the price paid for the uses/services of land and other free gifts of nature.According to classical economics, the only land is paid the rent which is the payment for an original productivity of the soil. But the modern economics says that other factors like labor, capital and organization are also paid the rent based on their scare supply. Economic Rent:Economic rent is the minimum amount of money that an owner of land, labor or capital must receive in order to let someone else use that land, labor or capital. In economics, the rent under discussion is always the economic rent. It is defined on the basis of the minimum amount of return that the owner of the factors excepts from its use. Contract Rent:Contract rent refers to that rent which is agreed upon between the landowner and the user of the land. It is the payment done according to the contract to the landlord. It is determined by the forces of demand and supply of assets in the market. In economic, it includes the interest on the capital invested and labor charges wages.

Interest

Interest is the reward for the capital. It is defined as the payment made by a borrower to a money lender for the use of production capacity of capital. Interest is the charge for the privilege of borrowing money. Interest can be divided into two types: -Net Interest and -Gross Interest

Wage

A wage may be defined as the sum of money paid under contract by an employer to the worker for services rendered. Rewards given to them for their performance are known as wages in economics.There are mainly two types of wages and they are nominal and the real wages.

Profit

Profit is the reward for taking risk and responsibility but not the reward from management or co-ordination. It is an income to the entrepreneurs. Profit is the difference between total revenue and total cost. Revenue is the amount obtained from the sales of production.