Lonely 2015

Country Travel Economy
Quesnay, Francois (1694-1774) long-run. Quasi-rents generally arise either because it takes time for new firms to enter and compete within a market where profits are being earned or because certain prices of factors of production may be fixed over the short-run which can be renegotiated in the long-run. As an example of the latter, suppose that a store is located on a particular site and its rental is fixed on the basis of a ten-year lease. Halfway through the duration of the lease a new housing development is built near by, and the amount of business done, and the profits the shopkeeper makes, treble. When the time comes for renegotiation of the lease the owner of the site will raise the rental to equal the present value of the future stream of profits from the shop, since this is the maximum amount the shopkeeper would pay before he would move elsewhere (note that the salary’ or opportunity cost of a shopkeeper is included in costs and is therefore not a part of profit). The shopkeeper can either pay this new rental or leave, so the excess profits have now been turned into a genuine opportunity cost. What were profits in the short-run have become costs in the long-run, and such temporary profits, arising essentially because the system is not in long-run equilibrium, are known as quasi-rents.

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