RELATION BETWEEN RENT AND PRICE
According to Ricardo, rent does not enter into price. Out the modem theory of rent deviates from the Ricardum theory in this respect. Ricardo held that rent “!d n,’1 enrcr into the cost of production of the produce and hence did not affect its price. Rent rises because of the rise in price and not the other way round. We have seen that. according to this theory. rent is surplus over cost,
Price is determined by the cost of production at the margin where there is no rent. Hence. rent does not enter into price. The marginal dose of labour and capital just pays for itself and leaves no surplus. In fact the position of the margin, according to the Ricardian theory, is determined by price and not price by the position of the margin. Rent is thus not a part of price. Rent is price-determined and not price determining. It is true that the differential aspect of land is not a cause of price. If land A gives more valuable service than land B. the extra payment yielded by land A would not affect the price of the produce. In fact, here we are considering two different things. each being paid according to its em .;y or marginal productivity. There can be a similar ‘” .erential aspect of wages,. and we can argue that such differential payments do not affect the price of the product of labour. But ””ges do enter into price.
In another sense also. it may be argued that ‘tent does not form a part of price. Land is free gift of nature. No payment Is necessary to maintain the total supply of land. In this sense. rent is not a part of the supply price of land and consequently of the products of land. Since the supply of land is inelastic. it will always work Cor whatever it fetches under competition. Thus, the value of land completely depends on the value (i.e., price) of the product. and not vice versa. Suppose land is specific and it can be put to only one use and to none else. e.g .when land can be used for production in one dominant industry only. is again a case of inelastic supply tu a particular industry. since land has no other use. Here also it will work for whatever it can get. In this case also rent will be price-determined and not price determining
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