For people who have not done Economics – at any level, there is a good chance that they may not know the meaning of ‘Rent’ – in economics, here is the explanation.

When you have got used to a certain annuity – generally undeservedly – the rent is threatened. Now if a shop is located in an excellent and upmarket location, the shop gets ‘rent’. Imagine a hair cutting saloon which was charging Rs. 30 for a hair cut in a upmarket location (about say 15 years ago).  Now all the prices in that neighborhood would have gone up, because of inflation and generally because it is an upmarket area. To keep in line with the other services the ‘barber’ also keeps increasing the rates for hair cuts. However at a point of say Rs. 100 people start resisting. They complain, the crib, they try to reduce the number of hair cuts – but generally it is not a flexible purchase, is it?

So here if you pay Rs. 250 for a hair cut, YOU need to understand that the price is to be broken up as:

Labour charges                       25

Rent                                          225

Now how much of the rent is justified is decided by the market. The existing saloon may just sell off and a new guy may start a new business in the same place. Funnily this will increase the rent for an already existing saloon (which is within an easy reach in the same catchment area!).

We had a caterer who used to run our office canteen. He was not a great cook and the food used to be all right to bad. Then we went from one location to two. He started catering to the second office also.

One fine day he decided to hand over the canteens to 2 of his ‘friends’ – and the company did not object. After 4 months one of the new ‘contractors’ told us ‘that guy charges me Rs. 200 and charges the other guy also Rs. 200 per DAY as rent’. The justification is “I introduced you to a business, so I deserve it”…now THIS Rs. 400 is also RENT.

Welcome to economics! well come to rent!

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  1. Thanks Deepak! when the house that you bought for 30,000 is worth Rs. 2 crores, will not the school fees, doc fees, dentists charges, masala dosa, …all go up?

    is it so diff to understand or people are in a denial mode?

  2. i dont think the 225 is a ‘rent’ at all. the 225 is a mix of both a)opportunity costs for the population being served and b)competitive forces.

    some people in the same area (shri vidal sassoon for example) could charge 4000 per haircut.
    if people deem 4000 to be ‘worth it’, then 4000 is the right price.actually there is no right or wrong price.there is only one price -the paid price.

    inflation ofcourse is a different comes not from competitive pressure to increase prices (the free market actually reduces prices),but from increase money supply/credit into the general economy pushing up all prices.
    when one says it is an ‘upmarket area’,it doesnt mean billu barber can charge 500 just because he wants.even in cuffee parade area,one can get 5 rupee cutting chai or 20 rupee ‘italian’ haircuts.

  3. CAs talking corporate governance !! ha ha ha…
    Anybody talking CG in India clearly has another agenda.

  4. Economics-amused these days,rent in Bangalore too has got no sense,but sad part is that we are left with very few option,hence whatever is asked gets paid.Practical issues like traffic,distance,all inclusive the service provider knows all-as well said that catchment area makes the difference.Just 15 years back myself was paying 5k monthly rent for 2bhk flat,now my maid pays that amount in toilets sharing small one hall space.Very Tough-paid price.

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