Showing posts with label cost. Show all posts
Showing posts with label cost. Show all posts

Thursday, 27 November 2014

Economic rent


From Wikipedia, the free encyclopedia/ Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

Jump to: navigation, search
This article is about economic rent in political economy and socioeconomics. For other uses, see Rent (disambiguation).
In economics, economic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production. In classical economics, Economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In neoclassical economics, economic rent also includes income gained by beneficiaries of other contrived exclusivity, such as labor guilds and unofficial corruption.
Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent should be viewed as unearned revenue[citation needed], whereas economic profit is a narrower term describing surplus income greater than the next best risk-adjusted alternative. Unlike economic profit, economic rent cannot be eliminated by competition, since all value from natural resources and locations yield economic rent.[citation needed]
In regard to labor, economic rent can be created by the existence of guilds or labor unions (e.g., higher pay for workers, where political action creates a scarcity of such workers). For a produced commodity, economic rent may also be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For operating licenses, it is the cost of permits and licenses that are politically controlled as to their number, regardless of the competence and willingness of those who wish to compete in the area being licensed. For most other production, including agriculture and extraction, economic rent is due to a scarcity of natural resources (e.g., land, oil, or minerals). When economic rent is privatized, the recipient of economic rent is referred to as a rentier.
By contrast, in production theory, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.[1][2]
Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy.[3][4][5] As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.
Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "External rent", whereby one economy received rent from other economies.[6]


Definitions[edit]

According to Robert Tollison (1982), economic rents are "excess returns" above the "normal levels" that are generated in competitive markets. More specifically, a rent is "a return in excess of the resource owner's opportunity cost".[7]
Henry George, best known for his proposal for a single tax on land, defines rent as "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities."[8]
The law professors Lucian Bebchuk and Jesse Fried define the term as "extra returns that firms or individuals obtain due to their positional advantages."[9]
In simple terms, economic rent is an excess where there is no enterprise or costs of production.

Classical factor rent[edit]

Classical factor rent is primarily concerned with the fee paid for the use of fixed (e.g., natural) resources. The classical definition is expressed as any excess payment above that required to induce or provide for production.
  1. "A payment for the services of an economic resource which is not necessary as an incentive for its production";[10] this can be simplified to when there is no enterprise given by the receiver of the economic rent
  2. "Any payment that does not affect the supply of the input";[11] this can be simplified to when there are no costs of production by the receiver of the economic rent
  3. "A payment to any factor in perfectly inelastic supply"[11]

Neoclassical Paretian rent[edit]

Neoclassical economics extends the concept of rent to include factors other than natural resource rents. But the labeling of this version of rent may be opportunistic or incorrect in that Vilfredo Pareto, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of rent.[12][13] The neoclassical understanding of "economic rent" is synonymous with the more appropriately named term "economic profit".
  • "The excess earnings over the amount necessary to keep the factor in its current occupation"[14]
  • "The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use"[15]
  • "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use"[16]

Monopoly rent[edit]

Some returns are associated with legally enforced monopolies like patents or copyrights. In addition, companies like Microsoft and Intel have important de facto monopolies that can be quite valuable. The American Medical Association has traditionally regulated the number of students that each US medical school can graduate and has been accused of maintaining the high incomes of doctors by restricting the supply of new doctors.[17] Some businesses, like public utilities, are by their nature monopolies. George Stigler estimated the impact of rents from non-labor monopolies on the US economy to be fairly low.[citation needed]

Land rent[edit]

In political economy, including physiocracy, classical economics, Georgism, and other schools of economic thought, land is recognized as an inelastic factor of production. Rent is the share paid to freeholders for allowing production on the land they control.
"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...."
— Adam Smith: The Wealth of Nations[18]
David Ricardo is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships (Law of Rent).
Johann Heinrich von Thünen was influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population, increasing the profitability of commerce and providing for the division and specialization of labor, that commanded higher municipal rents. These high rents determined that land in a central city would not be allocated to farming but be allocated instead to more profitable residential or commercial uses.
Observing that a tax on the unearned rent of land would not distort economic activities, Henry George proposed that publicly collected land rents (land value taxation) should be the primary (or only) source of public revenue, though he also advocated public ownership, taxation, and regulation of natural monopolies and monopolies of scale that cannot be eliminated by regulation.

Labour[edit]

The generalization of the concept of rent to include opportunity cost has served to highlight the role of political barriers in creating and privatizing rents. For example, a person seeking to become a member of a medieval guild makes a huge investment in training and education, which has limited potential application outside of that guild. In a competitive market, the wages of a member of the guild would be set so that the expected net return on the investment in training would be just enough to justify making the investment. In a sense, the required investment is a natural barrier to entry, discouraging some would-be members from making the necessary investment in training to enter the competitive market for the services of the guild. This is a natural "free market" self-limiting control on the number of guild members and/or the cost of training necessitated by certification. Some of those who would have opted for a particular guild may decide to join a different guild or occupation.
However, a political restriction on the number of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guild's training, especially for those already practicing, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the guild actually increases the returns to guild members as opposed to ensuring competence, then the practice of limiting entrants to the field is a rent-seeking activity, and the excess return realized by the guild members is economic rent.
The same model explains the high wages in some modern professions that have been able to both obtain legal protection from competition and limit their membership, notably medical doctors, actuaries, and lawyers. In countries where the creation of new universities is limited by legal charter, such as the UK, it also applies to professors. It may also apply to careers that are inherently competitive in the sense that there is a fixed number of slots, such as football league positions, music charts, or urban territory for illegal drug selling. These jobs are characterised by the existence of a small number of rich members of the guild, along with a much larger surrounding of poor people competing against each other under very poor conditions as they "pay their dues" to try to join the guild. (Reference: "Freakonomics: Why do drug dealers live with their Moms?").

Terminology relating to rent[edit]

Gross rent
Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land, and reward for the risk taken by the landlord in investing his or her capital.
Scarcity rent
Scarcity rent refers to the price paid for the use of homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous but demand exceeds supply, all land will earn economic rent by virtue of its scarcity.
Differential rent
Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo.
Contract rent
Contract rent refers to rent that is mutually agreed upon between the landowner and the user. It may be equal to the economic rent of the factor.
Information rent
Information rent is rent an agent derives from having information not provided to the principal.

See also[edit]

References[edit]

  1. Jump up ^ "Economics A-Z terms beginning with R". The Economist. 
  2. Jump up ^ What is Economic Rent?
  3. Jump up ^ Kittrell, Edward R. (1957). "Ricardo and the Taxation of Economic Rents". The American Journal of Economics and Sociology 16 (4): 379–390. doi:10.1111/j.1536-7150.1957.tb00200.x. JSTOR 3484887. 
  4. Jump up ^ Goode, Richard B. (1984). Government finance in developing countries. Brookings Institution Press. ISBN 978-0-8157-3195-5. Retrieved 2010-05-27. 
  5. Jump up ^ Hammes, John K (1985). "Chapter 6 - Economic Rent Considerations In International Mineral Development Finance". Finance For The Minerals Industry. AIME. ISBN 0-89520-435-5. Retrieved 2010-07-18. 
  6. Jump up ^ Hossein Mahdavy, "The Pattern and Problems of Economic Development in Rentier States: The Case of Iran", in Studies in the Economic History of the Middle East, ed. M.A. Cook (Oxford University Press, Oxford, 1970)
  7. Jump up ^ Tollison, Robert D (1982). "Rent seeking: A Survey". Kyklos 35 (4): 575–602. doi:10.1111/j.1467-6435.1982.tb00174.x. Retrieved 2010-07-21. 
  8. Jump up ^ George, Henry (1880). "Chapter 11 The Law of Rent". Progress and Poverty (4 ed.). Robert Schalkenbach Foundation 2006. ISBN 0-665-09522-8. 
  9. Jump up ^ Pay Without Performance — the Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried, Harvard University Press, 2004, (p.62)
  10. Jump up ^ "Definition of economic rent". HighBeam.com: Online Dictionary (www.highbeam.com). 2001-01-01. Retrieved 2010-05-27. 
  11. ^ Jump up to: a b Wessels, Walter J. (2000). "Chapter 27 Economic Rents". Economics (3 ed.). Barrons Educational Series Inc. p. 479. ISBN 0-7641-1274-0. 
  12. Jump up ^ Bird, Ronald; Tarascio, Vincent J (1999). "Paretian Rent versus Pareto's Rent Theory : A Clarification and Correction". In John Cunningham Wood and Michael McLure. Vilfredo Pareto: critical assessments of leading economists 2. Routledge (Taylor & Francis Group). p. 474. ISBN 0-415-18501-7. 
  13. Jump up ^ Foldvary, Fred E. (Jan 2008). "The marginalists who confronted land". The American Journal of Economics and Sociology. 
  14. Jump up ^ Shepherd, A. Ross (1970). "Economic Rent and the Industry Supply Curve". Southern Economic Journal 37 (2): 209–211. doi:10.2307/1056131. JSTOR 1056131. 
  15. Jump up ^ "Definition: economic rent". Research Tools Economics A–Z (The Economist (economist.com)). Retrieved 2010-05-27. 
  16. Jump up ^ Morton, John S.; Goodman, Rae Jean B. (2003). "The Story of Economic Rent: What do Land, Athletics and Government have in Common". Advanced Placement Economics (3 ed.). National Council on Economic Education. p. 266. ISBN 1-56183-566-8. 
  17. Jump up ^ Berlant, Jeffrey (1975). Profession and Monopoly: a study of medicine in the United States and Great Britain. University of California Press. ISBN 0-520-02734-5. 
  18. Jump up ^ "Wealth of Nations B.I, Ch.6, Of the Component Parts of the Price of Commodities"

External links[edit]

Retrieved from "http://en.wikipedia.org/w/index.php?title=Economic_rent&oldid=634668833"
on No comments:
Labels: , , , ,

Saturday, 1 December 2012

Procurement

Procurement is the acquisition of goods or services. It is favorable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location (Weele 2010) . Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.

Contents

 [hide] 

[edit] Overview

Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. If good data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.
An important distinction made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value may be employed.
Direct procurement and indirect procurement
 TYPES
Direct procurementIndirect procurement
Raw material and production goodsMaintenance, repair, and operating suppliesCapital goods and services
F E A T U R E SQuantityLargeLowLow
FrequencyHighRelatively highLow
ValueIndustry specificLowHigh
NatureOperationalTacticalStrategic
ExamplesCrude oil in petroleum industryLubricants, spare partsCrude oil storage facilities

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.
Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, Indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine lubricants to complex and costly products and services;[1][2] like heavy equipment and consulting services.

[edit] History

Prior to 1900, purchasing was recognized as an independent function by many railroad organizations, but not in most other industries.
Prior to World War I, purchasing was regarded as primarily clerical.
During World War I & II – The function increased due to the importance of obtaining raw materials, supplies, and services needed to keep the factories and mines operating.
1950s & 1960s - Purchasing continued to gain stature as the techniques for performing the function became more refined and as the number of trained professionals increased. The emphasis became more managerial. With introduction of major public bodies and intergovernmental organizations, such as United Nations, procurement becomes a well-recognized science.
1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain needed items from suppliers at realistic prices increased.
1983 - In September 1983, Harvard Business Review published a ground-breaking article by Peter Kraljic on purchasing strategy that is widely cited today as the beginning of the transformation of the function from "purchasing," something that is viewed as highly tactical to procurement or supply management, something that is viewed as very strategic to the business.
1990s - Procurement starts to become more integrated into the overall corporate strategy and a broad-based transformation of the business function is ignited, fueled strongly by the development of supply management software solutions which help automate the source-to-settle process.
2000s - The leader of the procurement function within many enterprises is established with a C-Level title - the Chief Procurement Officer (sometimes called the Head of Procurement). Websites, publications, and events, and that are dedicated solely to the advancement of Chief Procurement Officers and the procurement function arise. The global recession of 2008-2009 places procurement at the crux of business strategy.
2010s - The elevation of the function continues as Chief Procurement Officers are recognized as important business leaders and begin to take on broader operation responsibility.[3]

[edit] Topics

[edit] Procurement vs acquisition

The US Defense Acquisition University (DAU) defines procurement as the act of buying goods and services for the government.[4]
DAU defines acquisition as the conceptualization, initiation, design, development, test, contracting, production, deployment, Logistics Support (LS), modification, and disposal of weapons and other systems, supplies, or services (including construction) to satisfy Department of Defense needs, intended for use in or in support of military missions.[4]
Acquisition is therefore a much wider concept than procurement, covering the whole life cycle of acquired systems. Multiple acquisition models exist, one of which is provided in the following section.

[edit] Acquisition process

The revised acquisition process for major systems in industry and defense is shown in the next figure. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.[5]

Model of the Acquisition Process.[5]
The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and would proceed through a lengthy period of technology maturation, while a system based on mature and proven technologies might enter directly into engineering development or, conceivably, even production. The process itself includes four phases of development:[5]
  • Concept and Technology Development: is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability.
  • Concept and Technology Development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts.
  • System Development and Demonstration phase. This phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development.
  • The last, and longest phase is the Sustainable and Disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible.

[edit] Procurement systems

Another common procurement issue is the timing of purchases. Just-in-time is a system of timing the purchases of consumables so as to keep inventory costs low. Just-in-time is commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards. Typically a framework agreement setting terms and price is created between a supplier and purchaser, and specific orders are then called-off as required.

[edit] Shared services

In order to achieve greater economies of scale, an organization’s procurement functions may be joined into shared services. This combines several small procurement agents into one centralized procurement system.

[edit] Procurement process

Procurement may also involve a bidding process i.e.,Tendering. A company may want to purchase a given product or service. If the cost for that product/service is over the threshold that has been established (e.g.: Company X policy: "any product/service desired that is over $1,000 requires a bidding process"), depending on policy or legal requirements, Company X is required to state the product/service desired and make the contract open to the bidding process. Company X may have ten submitters that state the cost of the product/service they are willing to provide. Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed incompetent to provide the desired product/service, Company X will then select the submitter who has the next best price, and is competent to provide the product/service. In the European Union there are strict rules on procurement processes that must be followed by public bodies, with contract value thresholds dictating what processes should be observed (relating to advertising the contract, the actual process etc.).

[edit] Procurement steps

Procurement life cycle in modern businesses usually consists of eight steps:
  • Information gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.
  • Supplier contact: When one or more suitable suppliers have been identified, requests for quotation, requests for proposals, requests for information or requests for tender may be advertised, or direct contact may be made with the suppliers.
  • Background review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.
  • Negotiation: Negotiations are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.
  • Fulfillment: Supplier preparation, expediting, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.
  • Consumption, maintenance, and disposal: During this phase, the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.
  • Renewal: When the P/S has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.
  • Additional Step - Tender Notification: Some institutions choose to use a notification service in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external notification company.

[edit] Procurement performance

In July 2011, Ardent Partners published a research report that presented a comprehensive, industry-wide view into what is happening in the world of procurement today by drawing on the experience, performance, and perspective of nearly 250 Chief Procurement Officers and other procurement executives. The report includes the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure commonly called "spend under management" refers to the percentage of total enterprise spend (which includes all direct, indirect, and services spend) that a procurement organization manages or influences. The average procurement department also achieved an annual savings of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%.[6]

[edit] Public procurement

Main article: Government procurement
Public procurement generally is an important sector of the economy. In Europe, public procurement accounts for 16.3% of the Community GDP.[7]

[edit] Green public procurement

In Green public procurement (GPP), contracting authorities and entities take environmental issues into account when tendering for goods or services. The goal is to reduce the impact of the procurement on human health and the environment.[8]
In the European Union, the Commission has adopted its Communication on public procurement for a better environment, where proposes a political target of 50% Green public procurement to be reached by the Member States by the year 2010.[9]

[edit] Alternative procurement procedures

There are several alternatives to tendering which are available in formal procurement. One system which has gained increasing momentum in the construction industry and among developing economies is the Selection in planning process which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. The SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded.
ROSMA is a procurement acronym created by ATkearney.{Procurement Solutions Division} It stands for Return on Supply Management Assets and endeavors to quantify not only procurement but every piece of the procurement process including strategic resource management. { }

[edit] Procurement frauds

Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement.[10]

[edit] See also

[edit] References

  1. ^ Lewis, M.A. and Roehrich, J.K. (2009). Contracts, relationships and integration: Towards a model of the procurement of complex performance. International Journal of Procurement Management, 2(2):125-142.
  2. ^ Caldwell, N.D. Roehrich, J.K. and Davies, A.C. (2009). Procuring complex performance in construction: London Heathrow Terminal 5 and a private finance initiative Hospital. Journal of Purchasing and Supply Management15(3):178-186.
  3. ^ Rackspace Appoints COO
  4. ^ a b Glossary of Defense Acquisition Acronyms and Terms, 12th Edition (plus updates since publication) accessed on 22 April 2009, Defense Acquisition University
  5. ^ a b c Systems Engineering Fundamentals. Defense Acquisition University Press, 2001[dead link]
  6. ^ "Ardent Partners Research - CPO 2011: Innovative Ideas for the Decade Ahead". http://ardentpartners.com/research/index.php?main_page=product_info&cPath=4_12&products_id=7&zenid=31502d0624b52824ef3d794f118b9ebb.
  7. ^ Europa.eu
  8. ^ EC.Europa.eu
  9. ^ EC.europa.eu
  10. ^ "Combating Procurement Frauds Author Dr Irfan Ahmad". http://openlibrary.org/b/OL23998519M/Combating_Procurment_Frauds.
Benslimane, Y.; Plaisent, M.; Bernard, P.: Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective, in: Electronic Markets, 15, 3, 2005, pp. 213–224.

[edit] External links

Look up procurement in Wiktionary, the free dictionary.

 This article incorporates public domain material from websites or documents of the Defense Acquisition University.



The Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics
on No comments:
Labels: , , , , , , , , ,
Subscribe to: Posts (Atom)