DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name of the participants : 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 : Criticism of Ricardian theory of
Rent
Duration : 100 minutes
Teaching aids : PPT, Animation

CCP602.6 TO 7 1
Objectives
On completion of this period you will be able to
know:

 Criticism against the Ricardian theory of rent

CCP602.6 TO 7 2
Recap
We have learnt in the previous session

 The Ricardian theory of rent and

 Its assumptions

CCP602.6 TO 7 3
Criticisms in brief:

 Ricardian concept of rent is not clear

 It lacks empirical and historical evidence
 It is difficult to measure differential rent
 The theory assumes perfect competition which is
unrealistic

CCP602.6 TO 7 4
 Contd.,
 It gives undue importance to the law of diminishing
marginal returns
 Ricardo has mistaken the cause for effect
 It is wrong to assume that rent does not enter into
the cost of production
 Rent of land as a differential surplus applies to all
factors who supply is inelastic

CCP602.6 TO 7 5
 Criticisms :-
Some important critical views on this theory are :-

1) Perfect competition is illusory :-

In actual world we do not find perfect competition for

any product

It exists only in the imaginary world of classical

economists

CCP602.6 TO 7 6
2) Perfect mobility of factors is absent :-
Factors have no perfect mobility in actual practice

They may have to continue at a place where there are

low rewards for their services than else where

3) Full employment is a myth :-

Full employment of all factors is illusory as perfect
competition

CCP602.6 TO 7 7
4) Units of factor are not identical :-
All laborers are not equally efficient

All machines may not work with equal efficiency

Ability of entrepreneurship also varies from

producer to producer

So homogeneity of factors is a wrong assumption

CCP602.6 TO 7 8
5) perfect substitutability of factors is not
possible :-
Technically it is not always possible to substitute one
factor for other

6) Divisibility of factors too is not always possible :-

Some machines like blast furnaces are not available in

small units
7) Law of diminishing returns can be over come :-
In the initial stages of production increasing returns
can be obtained

CCP602.6 TO 7 9
8) Production methods change :-
Innovation & inventions bring-about change
in the methods of production

9) Marginal product is immeasurable :-

Total product is the result of co-ordinate & co-

operative effort of all the factors of production.

Marginal product cannot be attributed to any

one factor

CCP602.6 TO 7 10
10) Hobson’s Criticism :-
Hobson points out that if any unit of a factor is
with drawn the entire business may become
dis-origanised.

11) Supply is not fixed :-

This theory gives importance to the side of
demand only
But in the factor market,the supply side
is as important as the demand side

CCP602.6 TO 7 11
12) Keyne’s Criticism :-

This theory assumes that the employment can be

increased only by lowering the wages.

But Keynes says that a wage-cut will lead to a fall

in employment

As a whole wage-cut decreases the income and the

purchasing power of the people.

13) Long-run theory only :-

This theory is applicable only in the long-run

CCP602.6 TO 7 12
14) No ethical justification :-

This theory has no ethical justification as the

marginal product of a factor is the result of the
collective efforts of all factors

It cannot be given away to one factor only

CCP602.6 TO 7 13
Conclusion :-
Despite all criticisms:
Ricardo introduced the concept marginal

The views of Ricardo have been incorporated in

the modern rent theory
Ricardo gets the credit for initiating a discussion on
rent

CCP602.6 TO 7 14
Points to be considered :-
Ricardo says rent arises only in case of land

He assumes diminishing returns

He believes that land possesses indestructible &

original powers
Ricardo says there are two types of lands

A) Marginal lands ( MC=MR) - ( No rent lands)

B) Super-Marginal lands (MR=MC)-( rent lands )

CCP602.6 TO 7 15
Quiz Questions :-
1) Marginal lands are :-
A) MR=MC or rent lands
B) MC=MR or no-rent lands
C) Both of the above
D) None of the above

2) Ricardo says :-
A) Superior lands are cultivated first
B) Inferior lands are cultivated first
C) Both of the above
D) None of the above

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3) Ricardo says :-
A) Rent does not enter into price
B) Rent enters into price

C) Rent is a function of price

D) Both A and C

E) None of the above

CCP602.6 TO 7 17
Frequently asked Questions :-
1) How rent arises ? Critically evaluate Ricardian
view
(Or)

2) Rent is paid for the use of original &

indestructible power of the soil-discuss

3) Rent of land is a differential surplus enjoyed by

superior land do you agree or not ?

CCP602.6 TO 7 18
Assignment :

1. In general language ‘Rent’ means?

2. In Economics ‘Rent’ refers to?

3. Contract rent include what?

4. Explain David Ricardo’s Criticism on theory of Rent/

5. Explain Marshall’s definition on rent?

CCP602.6 TO 7 19
6. Explain the characteristics of land as given by Ricardo?

7. Write briefly Hobson’s criticism on the theory of Rent

8. Write the Keynes’ criticism on the

theory of rent given by Ricardo.

9. Explain why Ricardo’s theory of Rent has no

ethical justification?

10. Rent is paid for the use of original and indestructible

powers of the soil-Discuss.

CCP602.6 TO 7 20
Thank you

CCP602.6 TO 7 21