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Rent

The document discusses the demand and supply of land. On the demand side, the demand for land is derived from the demand for agricultural products, so demand rises and falls with population and food demand. Demand depends on marginal productivity which declines. On the supply side, the supply of land is fixed, making it perfectly inelastic - the quantity supplied does not change with price. The interaction of demand and supply determines rent. The document compares the classical Ricardian theory of rent, which saw rent arising from land quality differences, to the modern theory which sees rent as a general economic concept that can apply to all factors of production, not just land.

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Abhishek Singh
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62 views16 pages

Rent

The document discusses the demand and supply of land. On the demand side, the demand for land is derived from the demand for agricultural products, so demand rises and falls with population and food demand. Demand depends on marginal productivity which declines. On the supply side, the supply of land is fixed, making it perfectly inelastic - the quantity supplied does not change with price. The interaction of demand and supply determines rent. The document compares the classical Ricardian theory of rent, which saw rent arising from land quality differences, to the modern theory which sees rent as a general economic concept that can apply to all factors of production, not just land.

Uploaded by

Abhishek Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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• Demand Side:

• The demand for land is a derived demand. It is derived from the demand for the products of land. If
the demand for these products rises or falls, the demand for the use of land will correspondingly rise
or fall leading to increase or decrease of rents. For instance, if the population of a country increases,
the demand for food will increase, resulting in increased demand for land and rise m its rent, and vice
versa.
• The demand for a factor of production depends on its marginal revenue productivity (or in short,
marginal productivity). This productivity is subject to the law of diminishing marginal productivity.
That is why, as in the case of other factors, the demand curve DD shown in the following figures slopes
down from the left to the right. Thus, on the side of demand, rent of land is determined by its
productivity, not total productivity, but marginal productivity.
• Supply Side:
• The supply of land is fixed so far as the community is concerned, although individuals can increase
their own supply by acquiring more land from others or decrease its supply by parting with land. In
spite of reclamation projects, the effect of which on the total supply is negligible, the supply of land
remains practically fixed.
• It is a case of perfectly inelastic supply, which means that whatever the rent (the rent may rise or fall),
the supply remains the same. That is why it is said that land has no supply price. In other words, the
supply of land in general is absolutely inelastic and as such its supply is independent of what it earns.
Interaction of Demand and Supply:
• Comparison between the Ricardian Theory and the Modern Theory of Rent:
• Now that we have studied the two main theories of rent, viz., the Ricardian theory (or the
classical theory) and the modern theory of rent, we should be in a position to distinguish
between the two. We can see that both theories regard rent as a surplus.
• In Ricardo’s theory, the surplus is due to superiority (or natural differential advantage) of the
land in question over the marginal one. The superiority may be due to either quality of the land
or better situation. Also both theories of rent have the same concept of land, i.e. a natural
factor rather than a man-made factor like capital, but then where is the difference between the
two theories.
• The difference between two is basic and it lies in this that while Ricardo takes agricultural land
(the cultivation of which is subject to the law of diminishing returns sooner or later), the
modern economists, on the other hand, do not confine the concept of rent to agricultural land
only.
• As we have said earlier, rent can arise in the sense of surplus in the case of other factors of
production also and even in a situation of increasing returns. Rent represents the opportunity
cost or transfer earnings. In this sense, rent is of a more general nature applicable to all factors.
That is why it is said. “It (land rent) is leading specie of large genus”. That is, land rent is not a
separate class by itself. It is only a prominent example of its type.

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