Rent and Price

According the Ricardian theory, rent is price determined, not price determining. Rent is a surplus over cost of production determines price. Hence it is price that determines rent. In our example, we have seen that when all ‘A’ grades land are exhausted and demand for food-grain rises, price rises. Price continues to rise and ‘B’ grade land is taken up for cultivation when price is equal to the average cost of production in ‘B’ grade land. This automatically produces a surplus in ‘A’ grade land whose average cost is lower than ‘B’ grade land.

Ricardo’s analysis appears to be justified from the social point of view Land is a free gift of nature and from social point of view, its supply is limited. It has no cost of production. Since rent is not a part of cost of production, it does not determine price. But from individual’s point of view, land is not a free gift of nature, Its supply is relatively inelastic and a payment has to be made to bring it into use in any given occupation. This constitutes the cost of production. The moment rent becomes a part of cost of production, it determines price. Thus from the point of view of a particular industry or occupation, rent determines price.