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Chapter 11. Land and Rent

1) Land is defined as all natural resources on, above, and below the earth's surface including things like soil, water, forests, minerals, and climate. 2) Characteristics of land include limited and fixed supply, it is a free gift of nature, non-perishable, heterogeneous, and immobile. 3) Rent is the price paid for the use of land and is determined by the demand and supply of land. Theories of rent have evolved from only considering differences in land fertility to recognizing that all scarce factors can earn rent.

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Santosh Bhandari
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1K views17 pages

Chapter 11. Land and Rent

1) Land is defined as all natural resources on, above, and below the earth's surface including things like soil, water, forests, minerals, and climate. 2) Characteristics of land include limited and fixed supply, it is a free gift of nature, non-perishable, heterogeneous, and immobile. 3) Rent is the price paid for the use of land and is determined by the demand and supply of land. Theories of rent have evolved from only considering differences in land fertility to recognizing that all scarce factors can earn rent.

Uploaded by

Santosh Bhandari
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Factors of production:

1) Definition and characteristics of


land
2) Theories of rent

By
Thaneshwar Bhandari
Assistant Professor
To: 1st Semester: Year one TU/IAAS
Date of Presentation: 4th August 2014
Land
• Definition: A/c Marshall, not only the land in a strict sense
but whole materials or the forces which nature gives freely
for man aid in land and water, in air, light and heat;
• Surface assets: Land for production is upper surface of the
crust, its properties and forests or other plants growing on it
naturally;
• Other surface assets: Mountain, rivers, lakes, ponds etc
found in it; including fish and ocean creatures;
• Underground assets: minerals , crude oils
• Over-surface assets: climate, wind, sunlight, heat etc

Thus, land is defined as all those gift of nature in their original


form which can neither be reproduced by man or destroyed
by him
Characteristics of Land
1) Limited supply: Man can not create land only use
or improve; Perfectly inelastic supply.
2) Free gift of nature: only it is free gift, just buying
ownership;
3) Non-perishable : Long use, can change shape and
size but not destructible;
4) Heterogeneous in nature: Sandy, marshy, barren,
desert or fertile characteristics;
5) Immobile: Geographically immobile, only the
products can move.
Rent
• A/O D.Ricardo, Rent is the price paid for services of land (all
natural gift on, under or over surface);
• Gross rent: Rent paid on contract (includes land rent +interest
on capital, wage of caring land all)
• Economic rent: Price paid for the services of the land. He
believes that land earns rent because its supply is perfectly
inelastic;
A/o Marshall: Rent as income derived from the ownership of
land and other free gift of nature. He said that, inelastic
nature of land supply and free gift of nature are only
society’s point of view. It means to a individual or firm or
industry, land is available at a price and supply is not perfectly
inelastic. Not only rent includes for land but also cover man-
made equipments whose supply is inelastic in short-run
(Quasi-rent
Modern concepts of rent
• Prof. Boulding and Mrs John Robins pointed the rent
is applied to all factors of production;
• Qualities of land and rent exists to some extent
among all the factors;
• Supply of all factors is not always perfectly elastic;
• Surplus income, “which a factor earns” above the
minimum earnings called rent; The minimum
earning was called as transfer earnings;
• Rent = Maximum earning from a piece of land –
transfer earnings
Recardian theory of rent
• Rent is surplus, which accrues to the owners of land
by reason of relative advantages of fertility or
situation or both which a particular plot of land
enjoys over less productive plots.
• Other way of definition: Rent is that 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;
• It means, rent is paid to the owner, Land gets rent
for its natural and non-perishable powers
Cause of rent: a) difference in the productivity of
various pieces of land; and b)situational differences
Assumptions
1) Fixed supply of land
2) Free gift of nature
3) Original power : Qualities of land don’t disturb by the mankind
4) Indestructible power: Quality mostly same
5) Cultivation in order of fertility: Land is used in the order of fertility: fertile
land use first
6) Difference in fertility: Some piece of land are more fertile than other
7) Law of diminishing returns but increasing food demand because of high
population;
8) Perfect competition;
9) Long-run;
10) Intra-marginal to marginal land;
Marginal : Poorest quality of land, no rent land. i.e. land that just cover its cost
only. Income from it is equal to its cost;
11) Location of land in different situation: Near/far from market
Explanation of the theory
• He fixed two ideas for rent:1) Land is fixed in supply
ii) it differ in fertility;
• Considered rent as surplus which arises due to the
differences among the plots of land in fertility and
situation;
• Distinct rent from intra-marginal land to marginal
land: plot of land produce more than marginal and
earns only rent;
• Rent arises in both farming techniques: Extensive
and intensive cultivation;
Rent under extensive cultivation
• Extensive farming: farm production is increased
by using more and more land;
Marginal production Rent Grade of Marginal Rent
land production
(Tons/Acre)
25 A 25 (25-10)=15

20 B 20 (20-10)- 10

15
C 15 (15-10)=5
D 10 (10-10) =0
10

0 Rent

A Marginal production
B
C
D
Rent under intensive cultivation
• Intensive cultivation is used to increase the
production from the same piece of land by using
more and more units of labour and capital;

• Production increases at a diminishing rate when


more and more units of labour and capital are
employed on the given piece of land.

• Rent arises even when all plots of land are alike in


fertility and situation.
Rent under intensive farming
Unit of labours and capitals Marginal production (in Surplus production or rent
tons)
1st 25 25-10=15
2nd 20 20-10=10
3rd 15 15-10=5

4th 10 10-10=0

4th Unit is called Origin of rent under intensive farming


marginal unit of 30
labour and
Marginal Production (Tons)

25
capital
20
15
10
5
0
1st 2nd 3rd 4th
Criticism of Ricardian Theory
• How rent is determined was not explained by Ricardo;

• Dubious theory on land fertility, original power and


indestructible power of land;

• Using high fertile land first was historically wrong


theory. Latest economist like Carey and Roscher issued
and suggested to show the proof of.

• Neglect the definition of scarcity in renting: Ricardo


believed rent as differential surplus but not considered
demand of land is much more than supply.
Criticism of Ricardian Theory (cont..)
• Wrong assumption of perfect competition
• Wrong assumption of no rent land : other use of
land except farming is not considered;
• Every land is fertile in some other sense are
ignored;
• Rent enters into the price for all kinds of land;
• Failed to determine rent.
• Wrong assumption of application of Law of
Diminishing Returns.
Modern theory of rent
• Marshall, John Robinson and Boulding combined
the concept called modern theory of rent;
• “Not only land earn rent but other factors of
production i.e. labor, capital, organization, and
entrepreneurs are entitled to earn rent. Scarce
land earns scarcity rent and differ in fertility of
land earns differential rents”
• Land rent is determined by the force of demand
and supply theory; It is also called scarcity theory
of rent.
• Greater the scarcity of land and other factors,
higher will be the size of rent earned
Rent determination

D1

D S
Rent (Rs)

R1 E1
D2
R
E

R2 E2

O
Q2 Q Q1 Quantity
Explanation of demand & supply force theory
Demand side of the land
• Derived demand: Higher is the demand of produces,
demand of land rises, price of services of land (rent)
will be higher;
• As we go investing more and more on same piece of
land, its marginal revenue productivity of land goes on
declining;
• So, land will be demanded only upto that point where
marginal productivity of land equals it’s cost of
cultivation;
• More land will be demanded at lower levels of rent. So
demand curve for land slopes downward from left to
right.
• Supply side:
• Supply of land can not be altered for the society as
a whole;
• Land can be used and demanded for multiple ways;
• So, supply of land can be changed or elastic;
• In individual firm or industry can get more land by
bidding up its price

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