Modern Theory of Rent
The modern theory of rent states that rent is the payment made for the use of any factor of production whose supply is fixed. In other words, rent arises due to the scarcity of a factor of production.

Elasticity of Supply and Rent
- The elasticity of supply of a factor of production plays a crucial role in determining the level of rent.
- If the supply of a factor is perfectly inelastic (i.e., fixed), any increase in demand will lead to a significant increase in rent.
- On the other hand, if the supply of a factor is elastic, an increase in demand will not lead to a substantial increase in rent as the factor can be easily obtained.

Diagram Illustration
- In a diagram, the supply curve of a factor with perfect inelasticity is vertical, showing that the supply is fixed.
- When there is an increase in demand (shift in the demand curve to the right), the equilibrium price (rent) rises significantly.
- Conversely, in the case of elastic supply, the supply curve is more horizontal, indicating that the factor can be easily supplied.
- An increase in demand in this scenario leads to a smaller increase in rent, as the factor can be readily obtained from various sources.
In conclusion, the modern theory of rent emphasizes the relationship between the scarcity of a factor of production and the level of rent, with the elasticity of supply playing a crucial role in determining the extent of rent increase in response to changes in demand.