In economic theory, the price of a finished item affects the factors of production, the various costs and incentives

of producing it, so as to 'attract' it toward a theoretical Factor price. Simply put, factor price is why the price of an item tends to approach the cost of producing it. There has been much debate as to what determines factor prices. Classical and Marxist economists argued that factor prices decided the value of a product and therefore the value was intrinsic within the product. For this reason, the term 'natural price' is often used instead. Marginalist economists argue that the factor price is a function of the demand for the final product, and so they are imputed from the finished product. The theory of imputation was first expounded by the Austrian economist Friedrich von Wieser.

RENT
MEANING OF RENT Rent can be termed as the reward for land which is one of the four factors of production. For economists, the term 'land' indicates natural resources like ground water, forests, rivers, oil fields, mineral deposits, etc., apart from the physical soil. Since land is a natural product and cannot be reproduced, the supply of land is permanently fixed and in general perfectly inelastic. Usually the term rent refers to the payment made to the owner of the factor to use the same for a specific period of time. Here, the term land includes any material asset which has a fixed supply. For instance, payment made to use a house, vehicle, or machine is termed as rent. However, economists term it as 'contract rent' as it includes return on capital invested in material assets. 'Economic rent' is the term used by economists to refer to the payment made for usage of land.

Quasi-rent : According to Alfred Marshall (Marshall), an English economist, rent is the income obtained due to ownership of land and other natural resources. Marshall opined that land is a natural resource and its supply is perfectly inelastic considering the society as a whole. However, for an individual person, firm, or industry, the supply of land depends on the prevailing rent thus it is elastic in nature. In his view, as the supply of land is fixed, rent can be earned even in the long-run. Apart from land, other factors which have limited supply can also earn rent but only for a short- period of time. 15. THEORIES OF RENT Various economists have proposed different theories for the origin of rent. Prominent among the theories of rent are the Ricardian theory and the modern theory of rent. Ricardian Theory: David Ricardo, (Ricardo) a British economist, proposed the 'Ricardian theory of rent'. The definition of rent as, "Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil." It can be deduced from this definition that rent arises due to the following two reasons: 1. Differences in the productivity of various pieces of land. 2. Situational differences .

. Modern Theory of Rent The modem theory of rent is an integrated set of ideas of different economists such as Marshall, Joan Robinson, and Boulding. The modem theory improves on Ricardo's theory

of rent and extends the concept of rent which was linked to land alone to other factors of production which have inelastic supply in the short run. Ricardo believed that the supply of land is permanently fixed i.e., perfectly inelastic, and further the various lands have different fertility levels. The surplus produced by more fertile lands over the marginal land is considered to be the rent. INTEREST

INTEREST
What is Interest? The reward for capital is known as interest. The owner of the capital receives interest for lending his/her capital to others. Capital can be classified into two types fixed capital and variable capital. In fact, when we say capital, it includes both fixed and variable capital. However, interest is the income earned only on the variable capital. Interest is earned only on that portion of capital which is given by the owner to the borrower. In other words, it is the price paid by the borrower to the lender who parted with his money. Why do people get paid for lending their money? Money in the form of cash provides the holder with benefit because it enables him to buy anything that he desires. However, if an individual lends it to another person, then he will have to wait until he gets back his money and only then he can utilize it. According to John Maynard Keynes, "Interest is a reward for parting with liquidity for a specified period." 29. Basic Concepts Gross interest : When the borrower pays an amount to the lender for borrowing the lender's money, the amount so paid by the borrower is known as 'interest'. Therefore, when people refer to interest, they generally refer to 'gross interest'. Gross interest is the total amount paid by the borrower to the lender of the money. Net interest : Net interest is the amount paid to 'capitalists' only for the use of 'capital'. It is the reward paid to the capitalists exclusively for the use of capital. Net interest is the compensation for lending capital to others under conditions where there is no risk or inconvenience due to investment (investments made with no savings motive) and the lender is not required to perform any work other than lending his money. Therefore, net interest is a part of the gross interest. Gross interest consists of some charges along with the net interest. 30. Gross Interest = Price of the Capital (Net Interest) + Reward for taking risk of money lending + Reward for management of loan + Others (such as the reward for accepting the inconveniences involved in money lending). Gross interest thus includes compensation for loan of capital, compensation to cover risk of loss (either business risk or personal risk), compensation for inconvenience of investment, compensation for work and apprehension related to monitoring investment. Saving and investment: According to the theory, savings and investment are not interdependent. It is known that the income level changes along with the changes in investments. The changes in investment levels invariably have an impact on the savings of individuals. Therefore, it is not correct to say that saving and investment are independent of each other. 31. Liquidity Preference Theory of Interest John Maynard Keynes (Keynes) propounded the 'liquidity preference theory of interest'. His theory is based upon the belief that people prefer absolute liquidity (cash) to other forms of wealth in the short run. Keynes criticized the classical theory of rate of interest on the grounds that they combined real and monetary factors together. According to Keynes, the rate of interest is

purely a monetary phenomenon. He said that determination of interest, thus, is dependent upon the demand for and supply of money in the economy. Keynes proposed that interest is equilibrium between the demand for and supply of money.

PROFIT
PROFIT What is Profit? Just like rent is the reward for land, wages for labor and interest for capital, profit is the reward for entrepreneurship. While the rewards for other factors of production are paid by the entrepreneur, profit is the reward received by entrepreneur himself. Simply put, profit is the income of an entrepreneur for utilizing his entrepreneurial abilities and running a business. Profit is nothing but the surplus amount left with the entrepreneur after paying all the factors of production. If the income earned by him is in excess of the costs incurred on the factors of production, then the income can be called as profit. Therefore, profit can also be defined as the difference between the total value of output (total revenues received by the businessman) and the total value of inputs (total costs incurred by the businessman) of a business. Profit =Value of Outputs Value of Inputs 37. Profit is also viewed as a reward earned by the entrepreneur for performing the entrepreneurial function in a business. There are other economists who believe that profit is the reward for making innovations in business. Basic concepts Profit consists of two major components - gross profit and net profit . Gross profit : Generally, people consider profit as the residual income left with the entrepreneur after making all the payments to other factors of production. However, it should be noted that this is gross profit. The gross profit is arrived at after excluding all the explicit costs from the revenues received by the business. It does not exclude implicit costs such as rent forgone by entrepreneur for utilizing his own land for business purposes, interest forgone on his own capital, etc. Gross Profit =Total Revenues - Total Explicit Costs Gross profit thus includes those costs which go unrecorded in the books of accounts, but which are nevertheless important to determine the profit made by the business. 38. Net profit: The net profit can be arrived at by subtracting the implicit costs from gross profits. This is also sometimes referred to as 'pure profit'. Net profit is the surplus leftover after deducting explicit and implicit costs from the sales receipts of a business. Net Profit =Gross Profit - Implicit Costs Thus, it can be observed that net profit is a portion of the gross profit. When a business gets zero net profit, it means that the profit attained is just enough to meet the explicit costs of the business. In other words, the entrepreneur's revenues could not payoff his efforts (or implicit costs) such as utilizing his own resources, undertaking risk and uncertainty of business, etc. 39. Normal profit : It is the minimum return that an entrepreneur receives for performing entrepreneurial functions such as bearing risk and uncertainty, managing other factors of production, etc. Abnormal or super profit: The income remaining with the entrepreneur after subtracting all costs (both implicit and explicit) from the revenues received from the business. It is an excess over the normal profit. 40. THEORIES OF PROFIT Though there are several theories of profit that attempt to explain the emergence and growth of profit, none of the theories give a comprehensive picture on profit. Traditional Theories : F.A. Walker one of the prominent non-classical economists, propounded the 'rent theory of profit ', which was similar to David Ricardo's (Ricardo) 'theory of rent '. Later, Taussig and

Davonport developed the 'wage theory of profit ' and proposed that like a laborer works physically and earns his wage, an entrepreneur works mentally and earns his wage called profit..