Factor Payments (economics) - Theory of Rent

Theory of Rent

This theory was first developed by the great economist David Ricardo it was called The ricardian theory of rent. Ricardo defined rent as that portion of produced of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil. However later on the modern theory of rent was developed by the modern economists. The main difference between the Ricardian theory and this theory was that, ricardian theory used the difference between surplus enjoyed from superior land to the inferior land. In the modern theory the rent was determined by the demand and supply forces in the market like the other factors of production.Demand for land means total land demanded by the economy as a whole.Demand for land like others depends upon the marginal revenue productivity. Rent paid by the economy will be equal to the marginal revenue productivity which is also subject to law of diminishing returns. this suggests that the demand curve like any other demand curve will be downward sloping.It shows that the demand for land and rent are negatively related. On the other hand supply of land for an economy is fixed that is it is perfectly inelastic.