What is 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.

How Does Economic Rent Work?

For example, your economic rent is the amount of money that makes you get out of bed in the morning. As the owner of an economic factor of production (your labor and skills), this factor has a value to you, and that value probably has something to do with the amount of debt you're in, the bills you have to pay, and the money you want to save. The value may vary depending on the demand for your skills and your own inclinations about work, but your economic rent is usually equivalent to the salary and compensation you are willing to accept to do a job.

Why Does Economic Rent Matter?

Everybody has a price, and every other factor of production has a price, too. For example, the owner of a piece of land or a large amount of cash is willing to rent it or sell it for a price that is at least equal to what it costs that owner. In some cases, economic rents are profits in excess of what the market would otherwise allow. Usually a company can receive these kinds of economic rents if is a monopoly or part of a cartel.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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