Economic Rent and Transfer Earnings

Diagram for Economic Rent and Transfer Earnings

economic rent

Definition of Economic Rent

Economic Rent refers to income earned from a factor of production which is greater than the minimum necessary to bring the factor of production into operation.

Example of Economic Rent – Labour.

Suppose a football player would be willing to work for £200 a week. If the football player got paid £1,000 a week. His economic rent is £800 a week.

Economic rent is the area between the supply curve and the wage rate. The supply curve indicates the minimum wage people are prepared to work at.

Example of Economic Rent – Property

Suppose a landlord has a property and he would be willing to rent it out for a minimum of £400 a month. If the landlord was able to rent the property for £950 a month, then his economic rent is £550.

 

Definition of Transfer Earnings

Transfer Earningsare defined as the minimum payment necessary to prevent a factor of production moving to a different use.

Example of Transfer Earnings for Labour.

A worker may have a transfer earning of £150 a week. If he was paid less, he wouldn’t want to work in that occupation. For example, a worker may feel he is better off claiming unemployment benefits that working for less than £150 a week.