Modern theory of rent is an improvement or modification over the Ricardian theory of rent. Economists like Marshall, Mrs. Joan Robinson and Bounding contributed to the ideas of rent which is called modern theory of rent. Ricardo's theory explains why one land commands higher rent than another. But it fails to answer who rent arises. The modern economist’ has evolved a theory called the scarcity rent.
Scarcity rent is the modified version of the demand and supply applied to land. According to the modern theory, rent arises due to the relative scarcity of land in relation to its demand. The greater the demand for land the higher shall be its rent. Thus Rent is the resultant of the interaction of the forces of demand and supply in relation to land. The modern theory of rent is also called on the demand and supply theory.
The demand for land is derived demand. It is derived from the demand of the products of land. If the demand for products increases, there will be a corresponding increase in the demand for the use of land. The demand for a factor depends upon its marginal productivity which is subject to the law of diminishing marginal productivity. That is why the demand curve for a factor slopes downward from the left lo the right. The downward sloping demand curve expresses that more land will be demanded at lower rent. Hence the demand curve for land slopes downward from left to right.
So far as community is concerned the supply land is fixed. Thus increased rent cannot increase supply. Nor fall in price of land can decrease its supply. Land has alternative i.e. it can be used in several ways. For a particular industry. So far a particular industry, or firm, the supply of land can be changed it is elastic.
Any individual can get more land. Hence the supply curve of land for an individual industry is having an "upward slope". Supply of land is negligible. Land represents present mobile. land represents a case of perfectly inelastic supply- The rent of d may rise or fall but the supply of land remains the same.
Rent is determined at the point where demand for and supply land intersect each other. This is shown in the diagram given
'DD' and 'SS' are the demand as well as supply curves o land respectively. At point E the demand for and supply of land are equal OW is the rent. If the rent is less than OW, the demands for land will- increase. Since the supply of land is fixed, rent will rise again to OW. If rent rises above OW i.e. OW, then the demand for land will decrease and bring the rent back to OW.