What do you really mean by Quasi rent?

The concept of Quasi rent was introduced in Economics by Dr. Alfred Marshall. This concept is used for the surplus earned by man-made factors other than land. Certain man-made factors become scarce in the short run. The surpluses earned by using these factors go to constitute Quasi rent.

According to David Ricardo Kent arises because of the fixity in supply of land. Rent is the price paid for the use of land. Land being a free gift of nature has no cost of production. That is why what it earns constitute rent. Thus the cause of paying rent is the inelasticity supply of land, lese are other factors other than land which are to be found in fixed supply. The supply of land is permanently fixed but the supply if other man-made factors are fixed in the short period. In case if land fixity in supply, is permanent but in case of other factors fixity is temporary.

Thus in short period the supply of both lands other factors is fixed and inelastic. The additional income earned these factors in; the short-run is similar to Rent. Marshall coined rent as Quassi Rent. Thus quasi rent is the short run earnings a machine minus the short run cost of keeping it in running order

Quasi rent accrues to the man-made machines during short period. It is a short run surplus. It disappears in the long run. In short period due to excess demand for the capital equipment is rent arises. It disappears in the long run because the supply such capital equipments increase in response to increased demand. Specific capital equipment has no alternative use and it remains fixed in the short period even if its income becomes zero.

As the transfer earning of the capital equipment in the short run is zero, the whole of the earnings of the machinery in the short period are surplus over transfer earnings. In the long run the supply of man-made factors can be increased to meet the increased demand.

As a result of increased supply the excessive earnings will disappear. In the long run, therefore the competitive equilibrium is attained when the earnings from the capital equipment are just sufficient to keep them in running order. Thus in the long run no surplus over cost of production is earned by the capital.

Dr. Marshall explained the concept of quasi rent in another context. In long run the price of the commodity must cover prime cost and supplementary cost. In the long period the price must cover both the costs, otherwise the firm will leave the industry. The firm can bear the loss so long as it covers the prime cost in the short period.

Thus prime cost is minimum cost below which the price should not fall. According to Marshall Quasi Rent will emerge if the price of the product exceeds the prime cost in the short period. The Quasi Rent is measured by the extent of price over the prime cost in the short period Thus Quasi-Rent = Price – average prime cost (Average variable cost).

The modern economists express Quasi-Rent as a short-run surplus over average variable cost. It is the difference between total revenue and total variable cost in the short-period. The determination of Quasi rent can be explained through

In the diagram, price OP is equal to AR and MR as there is perfect competition. AVC, ATC and MC curves represent average variable cost, average total cost and marginal cost.

At OP price Dint of equilibrium is ‘E’ where MC = MR. At this equilibrium it output is OM. Here AVC is FM and price is EM (OP). EF 4E-FM) is the quasi rent per unit of output. The total quasi rent measured by shaded rectangular EFGP. It is worth noting that firm is incurring losses as ATC curve lies higher than price OP Supposing OP price falls to OP1 level and the new equilibrium is attained at point E1 where MC=MR. Price covers only the variable cost. Here price = AVC. As there is no surplus over variable cost, no quasi rent arises. In such a case OP1 price is the minimum price at which firm produces output.