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elasticity of demand & Ricardo Theory of rent

 ELASTICITY OF DEMAND:

The concept of elasticity of demand was introduced by Professor Alfred Marshall. The degree of responsiveness of quantity demanded to a change in its price or any other factor. In other words, the degree of change in quantity demanded due to change in price in unknown as elasticity of demand. 

There are 3 types of elasticity in demand that are-

  1. Income elasticity of demand: when there is a change in income, the effect on demand due to change in income such as demand increase with increase in income, decrease in demand with increase income & demand is constant with increase in income. 


  1. Cross elasticity of demand: when change in price of one commodity effect the demand of another commodity. 



  1. Price elasticity of demand: when changes in the price of commodities effect the demand of commodities. 



RICARDO THEORY OF RENT:

Ricardo confined the use of economic rent to the price paid for the use of land only. The land is free gift of nature & the supply of land is absolutely inelastic. That is why supply of land does not depend upon  the rent or price of the land. The payment made by the tenant to the landlord is not the economic rent as per the Ricardo theory of Rent. A part of payment consist of interest on capital invested in the land by the owner. The total payment done by the tenant to the landlord is known as contractual payment whereas the part of payment that is made for the use of land only is called economic rent. 

The portion of the earth which is paid to the landlord for the use of original & indestructible power of the soil is the rent for the land according to Ricardo theory of rent. When the return on the capital investment is deducted from the contractual rent, what is left is pure land rent. 

The Ricardo theory of rent based on certain assumptions that are:

  1. The supply of land is fixed or supply of land is inelastic.

  2. The land can be used only for production of one crop. 

  3. The quality of land is different from one place to another. 

  4. There is perfect competition in the market for the land.

  5. The theory based on law of diminishing returns.

  6. The theory based on long run production. 



Different Rent



The rent of land is based on the fertility & productivity of land. If land A is more fertile than land B than rent for land A is higher than rent for land B. when population increases, demand for food increases and demand of cultivation marginal land increases as production from original land does not satisfy the food demand of the population. In that case less fertile land also cultivated in order to produce more food for consumption for the population.  

Ricardo theory applies to extensive & intensive cultivation of Land. In extensive cultivation more & more land is cultivated to produce more with the use of technology, machines, skilled labour, capital, etc. One the other hand, intensive cultivation is the process in which labour & human resources are employed for more production using primitive methods. 

The Ricardo theory of rent criticize on the ground of assuming that there is original & indestructible power of land as fertility of the land can be created thorough conservation, based on the sole idea of difference in fertility of land, assumes inelastic supply from the perspective of whole economy where as on the individual level the supply of land is elastic. These are some criticism of Ricardo’s theory of rent. 








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