rent.pdf Economics concept Semester 6___

Notes

1. DAVID RICARDO
CLASSICAL OR RICARDIAN
THEORY OF DISTRIBUTION

2. Select this paragraph to edit
A
B
C
D
RENT IS
SCARCITY
ARIES
DIFFERENCE
RENT DUE TO
QUALITY
A =
PRODUCE
“ CORN” ----
SELL –
PROFIT.
A = PROFIT ,
RENT MORE
THAN B
LAND :
DIFFERENCTIAL
RENT .
ECONOMIC
RENT
MARKET
EARN AS
COMPARE TO
“B”

8. Ricardian theory
The Ricardian theory of rent follows from the views of•
classical writers about the operation of law of diminishing
returns in agriculture. Classical authors, West, Torrents,
Malthus and Ricardo, each of them independently formulated
the theory of differential rent.
David Ricardo, a British economist, defined rent as, the•
portion of the produce of the earth which is paid to the
landlord for the use of the original and indestructible powers
of the soil. Ricardian rent is also known as pure rent. The true
economic rent is only a payment for the use of land. It
excludes interest on landlord’s investment

10. DAVID RICARDO
CLASSICAL OR RICARDIAN
THEORY OF DISTRIBUTION

11. RICARDIAN DISTRIBUTION THEORY
The importance of David
Ricardo‘s model is that it
was one of the first models used
in Economics, aimed at
explaining how income is
distributed in society.

12. RICARDIAN DISTRIBUTION THEORY
Ricardian theory is divided
into sectors but the
agriculture sector occupies a
crucial place since, it is the
forces working in agricultural
sector that determines the
distributional shares in the
industry.
Ricardo gave more importance to
agriculture than industrial sector

13. RICARDIAN DISTRIBUTION THEORY
RICARDO’S THEORY IS
BASED ON THREE
ASSUMPTIONS

14. ASSUMPTIONS OF RICARDIAN DISTRIBUTION THEORY
1) LAW OF DIMINISHING RETURNS
 IT IS ASSUMED THAT LAW of DIMINISHING RETURNS OPERATES IN
AGRICULTURE i.e. WHEN MORE LABOR IS EMPLOYED, AVERAGE AND MARGINAL
PRODUCT will DECREASES.
2) MALTHASIAN LAW OF POPULATION
 ACCORDING TO THIS LAW POPULATION WOULD INCREASE IF WAGE RATE RISES
ABOVE THE MINIMUM SUBSISTENCE LEVEL AND POPULATION WOULD DECREASE
IF THE WAGE RATE FALLS BELOW IT .WITH HANGES IN POPULATION AS A RESULT
OF VARIATION IN THE WAGE RATE ABOVE THE SUBSISTENCE LEVEL, WAGE RATE
TENDS TO BE EQUAL TO SUBSISTENCE LEVEL IN THE LONG RUN.
3) PROFITS ARE INCENTIVE TO ECONOMY’S GROWTH
 RIACRDO REGARDS PROFITS AS A NECESSARY INCENTIVE FOR CAPITAL
ACCUMULATION WHICH IS A KEY TO ECONOMIC GROWTH.

15. marginal principles: share of rent in national income.
Surplus principles: share of wages and profit in national income.
Ricardo discusses the
distribution of national
output among 3 shares of
rent, wages and profits.
Y=R+W+P
The principles
MARGINAL
PRINCIPLES
R AND W
SURPLUS
PRINCIPLES
(PROFIT )

16. *the curves of marginal and average productivity of labor are downward sloping due to
law of diminishing returns.
In Ricardian theory, production cost per unit of labor, equilibrium
position, must be equal to the marginal productivity of labor.
Total cost of production = marginal product of labor x no. of units of
labor employed.
Total product = avg. productivity OF LABOUR x no. of labor
AP=TP/QTY OF LABOUR
TP =AP*QTY OF LABOUR
Rent = Total product - TOTAL cost of production
RENT =AP*LABOUR - MP*LABOUR
RENT =LABOUR (AP-MP)
# Rent is the difference between the product of labor on marginal
land and the product on average land.

17. Step 1 : let we employee “om” labour
We want to find out the rent of the land =AP-
MP AT OM Labour
Step 2: At OM , WAGES =MIN subsistence level
“ ow “ ( assume )
OC = PRICE
Step 3: total
OMCD=CBDX,(BX=OM)(RENT
)+OWMK( WAGES )+BXWK(PROFIT ) (
SURPLUS ) ( SUPER NORMAL PROFIT )
PAHSES : AT 0N LABOUR
PAHSES 1 : Rent =AP-MP BWHT
PASES 2 : WAGES = OWNT( MALTHUS
ASSUMPTION )( MARGINAL PRICIPAL )
PROFIT = CAPITAL ACCUMLATION = Growth –
LABOUR DDD
IF WE MOVE D TO H
AP AND MP ( LAW OF DIMISHING RETURN )(
NORNAL PROFIT )
IF MP IS ZERO . OZZ=AP AND MP
DIFFERENCE : RENT , LABOUR , SHUT
POINT DWN

18. Select this paragraph to edit
At OM LABOUR
ME Marginal product
MD Average product
#MP-AP = ME-MD = ED
(Rent earned on land per unit labor employed
Total rent earned= ar BCDE
Marginal Product = Wages + profits
#wage rate  determined by minimum subsistence level
Suppose = OW is minimum subsistence amount of agricultures
Therefore, OW= wage
Ar. OMKW = share of wages
Ar. BEKW= share of profits

19. In the Ricardian scheme, the money rate of profit in the industry depends upon the
corn-rate of profit in agriculture. The change in CRP( corn rate of profit ) will bring
changes in IRP.( industrial rate of profit )
Due to law of diminishing returns, when we employ more and more labor, the MP &
AP falls and as they fall, rent will increase. As, RENT = AP – MP
# Fall in AP & MP of labor will lead to rise in the cost of production because
agricultural output increases less than in proportion to increase in labor because of
the diminishing returns.
#Increase in unit cost of production leads to rise in prices.
#As employment increases, profits goes on decreasing.
Because of fall in profits in agriculture, industrial profits will also decrease .
Decline in rate of profit leads in the Agriculture lead to the decline in the
profit in industrial sector

20. Ricardo theory of rent
Select this paragraph to edit
In Ricardo theory of the rent it was assumed that the•
employment in the economy is depend upon the capital
accumulation ie the ratio of the profit / wages .The % of the
rate of profit on which investment is made.
CA = P/W W= INC = COST = CA DEC
At equilibrium Money rate of profit (corn rate of profit ) is equal in
agriculture and industry .
But for agriculture sector input and output is same where•
as in agriculture input and output are different because in
industry inputs come from the agricultural sector and output
is the manufacture goods.
Given inputs and technology , output remain fixed and in the•
real scene money profit cant change , it change only when
wage and output per worker changes.
The fall in the corn rate of profit in the agriculture will bring•
about a fall in the money rate of profit in the manufacturing
sector ( as explained )
Agriculture development ---
labour demand increases ( AP
AND MP CHANGES )----- output
increases -----rent also increases
( as shown in graph ) ---wages
will increases than natural wage
-------- popu increases --- wage
decreeing ----in long run -----
contant .
it is observed that the increases
in output < incerases in cost ---
prices of corn increases ---rent
increases – wage is at
subsistence level – profit decline
( in both industry and
agriculture )
when profit decline --- capital
accumulation decline ------ profit
reduce to zero .

21. As a result of rise in prices of agricultural output, the money cost of subsistence level
will increase and therefore, the industries would have to pay higher wages to their
workers. Rise in wages of workers would mean that profits would decline.
Thus, profits in manufacturing industry would decline due to operation of diminishing
returns in agriculture & consequent rise in cost and prices of agricultural goods, even
though industries themselves may not be subject to diminishing returns.

22. conclusion
# In Ricardian macro-economic model, there is continuous tendency towards
declining rate of profits both in agriculture and industrial sectors of the economy.
#In this theory, profit has been regarded as a necessary incentive for capital
accumulation in the economy.
#When the profit rates decline, the rate of capital accumulation falls and ultimately
when the rate of profit is reduced to zero, investment and capital accumulation
would cease to exist and the economy would reach a state of stagnation where
further growth will completely stop.