DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : G.M. Lakshmi
Designation : Lecturer in CCP Section
Branch : Commercial and Computer
Section
Institute : Govt. Polytechnic for women.
Semester : VI semester
Subject : Business Economics-II
subject code : CCP-602
Major topic : Theories of distribution
Sub topic : Ricardian Theory of Rent and
Assumptions
Duration : 150 minutes
Teaching aids : PPT, Animation

CCP602.3 TO 5 1
Objectives
 On completion of this period you will be able to know:

 Ricardian theory of Rent and Assumptions

CCP602.3 TO 5 2
Recap
 We have learnt in the previous class :

 Meaning of rent
 Contractual rent
 Economic rent

CCP602.3 TO 5 3
Determination of Rent
 There are two theories:

 Ricardian Theory of Rent

 Modern Theory of Rent

CCP602.3 TO 5 4
Ricardian theory of Rent:

“it is that portion of the produce of the earth,

which is paid to the landlord for the use of
original and indestructible powers of the soil”

David Ricardo

CCP602.3 TO 5 5
Ricardo’s theory of Rent is based on the
following assumptions:

Land is a free gift of nature

It has no cost of production

Land is fixed in supply

Land has original and indestructible power

CCP602.3 TO 5 6
Assumptions contd.,

Land is heterogeneous (its fertility differs from place

to place)

 Land is immobile
Land is subject to the law of diminishing returns
Perfect competition in the use of land

CCP602.3 TO 5 7
 Contd.,

Malthusian law of population ie. Population growth

exceeds food production
 people will cultivate good and fertile land first.(rent)
 If all the best land is fully used, then
 The inferior lands are cultivated

CCP602.3 TO 5 8
Assumptions contd.,

 Inferior lands produce less than superior lands.

 The differences in produce are due to differences in
the fertility of the soil.
 The difference between the yields of superior and
inferior lands become Producer’s surplus.
 This is known as Rent according to Ricardo.
 The Theory is also known as the Theory of
differential rent or Differential surplus

CCP602.3 TO 5 9
 The Ricardian Theory of Rent

Basic points in the Ricardian Theory are:

4. Rent is the return for the use of land

 Rent is paid to the land lord for the use of

productive powers

CCP602.3 TO 5 10
• Rent is an indication of the
scarcity of land :
 Rent arises due to scarcity of fertile land and

 Un uniform quality of land

CCP602.3 TO 5 11
1. Rent is a residual product:

 It is surplus left after other factors are paid

CCP602.3 TO 5 12
1. Rent is differential surplus:

The following example illustrates the point

Let us assume a small self sufficient village community

Let us also assume there are 3 grades of land A, B and

C in the order of fertility i.e.

CCP602.3 TO 5 13
 Contd.,

 A is more fertile, than B and C is least fertile

 We also assume wheat is cultivated
 The amount of labour and capital applied on
these plots are same

CCP602.3 TO 5 14
 Contd.,

 When the community settles on land they will first

cultivate the fertile A grade land
 Land A is abundant in supply and there will be no rent
for it because no body would pay a price for its use
when it is abundant
 Say if the demand for wheat is 30 quintals, cultivation
of land A will be sufficient and it will be no rent land

CCP602.3 TO 5 15
 Contd.,

 If the population increases and the demand for wheat

increases say to 50 quintals the scarcity of land A will
be felt
 Then the inferior land B will be brought under cultivation

CCP602.3 TO 5 16
 Now the cost of cultivation on both land A and B will be
the same because the same amount of labour and
capital are employed
 The land A will yield 30 quintals of wheat and land B 20
quintals
 This means the land A realizes a surplus of 10 quintals
of wheat
 This surplus is called the producer’s surplus or rent i.e. it
is the surplus of superior land over inferior land

CCP602.3 TO 5 17
 Contd.,

 Now if the demand for the food increases further

to 60 quintals the land C which is much inferior to
A and B also will be brought under cultivation
 The same amount of capital and labour will yield
10 quintals of wheat
 When compared to land C, land B will yield a surplus of
10 quintals and land A will yield a surplus of 20 quintals

CCP602.3 TO 5 18
 Contd.,

 Now the land A and B will become superior or intra

marginal land
 Land A will yield a surplus of (30-10) 20 quintals
 Land B will yield a surplus of (20-10) 10 quintals
 The land C will be marginal land or no rent land

CCP602.3 TO 5 19
 C is the last grade land. Price of the produce must cover
at least the cost of cultivation
 Otherwise it is not worth for cultivation
 The last grade will have equal marginal cost and
marginal revenue

 MC=MR (Least Grade lands)

CCP602.3 TO 5 20
 Contd.,

 Hence these lands are known as marginal lands

 There is no surplus, hence no rent

 Marginal lands are known as no-rent lands

 Lands superior to them enjoy surplus-hence rent

exists for them

CCP602.3 TO 5 21
 Contd.,

 We may express the above in monetary terms

 Here we consider the rent as surplus over cost
of production
 Let us assume cost of production is same as
Rs. 500/- for all lands

CCP602.3 TO 5 22
 Then C grade land will be cultivated only if the
cultivator can get at least Rs.500/- by selling each
quintal
 Otherwise no cultivation for C Grade lands
 So the price per quintal should be Rs.50/- (500/10)
 Hence first two grades only are cultivated first in
order to enjoy rent

CCP602.3 TO 5 23
The following table shows the yields of the
three lands and the differential rent

Table showing differential rent

Grade Price x qty Surplus (rent)

Total Revenue Total revenue-cost
A 30 x50=1500 1500-500=1000
B 20x50=1000 1000-500=500
C 10x50=500 500-500=Nil

CCP602.3 TO 5 24
The following figure shows differential rent

CCP602.3 TO 5 25
 Thus as per the fertility of soil and due to other
 Advantages
 Lands are classified by Ricardo as:
 Superior Lands (Super Marginal Lands)
 Inferior lands (Marginal lands). Or no rent lands

CCP602.3 TO 5 26
 A and B grade land yields rent therefore they are
called as super marginal lands
 C does not yield any rent therefore it is called
marginal land or no rent land

CCP602.3 TO 5 27
5. Rent is a pure economic surplus

 Rent is an unearned income

 It arises due to fertility of the soil
 Land has no cost of production
 It is a surplus over the cost of cultivation

CCP602.3 TO 5 28
 Contd.,

 Powers of the are indestructible

 Differential rent comes due to diminishing returns

 Rent arises only in case of land

 Marginal land plays a major role in the

determination of rent

CCP602.3 TO 5 29
6.Rent is price determined:
 Corn is not high because rent is paid
 But a rent is paid because corn is high says
Ricardo
 Here corn represents all types of agricultural
product
 Ricardo says that prices are not high because
rents are paid
 But rents are paid because prices are high

CCP602.3 TO 5 30
 Contd.,

So Rent is a function of price while

 Price is a function of cost.

 Rent does not enter into price-says Ricardo

CCP602.3 TO 5 31
 On the marginal lands there is no surplus-hence there
is no rent

 Ricardo says rent arises as a differential advantage

 Which superior lands possess over inferior lands.

CCP602.3 TO 5 32
Summary
 Rent is a differential surplus
 It is the difference between the yield of super marginal
land over the marginal land
 Marginal land is no rent land where MR=MC

CCP602.3 TO 5 33
Quiz
1. No rent is called_________
2. Super marginal land yields _________

Answer :1. marginal land

2. economic rent

CCP602.3 TO 5 34
Frequently asked questions
1.Explain the Ricardian theory of rent and state the
assumptions

CCP602.3 TO 5 35