ILRLE 3440 Lecture Notes - Lecture 14: Diminishing Returns, Corn Laws, Natural Monopoly
8 May 2018
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20 March 2018
ECON 3300 - Lecture 14!
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David Ricardo’s Assumptions !
Long term wages is subsistence !•
All investment comes out of profits !•
Agriculture is subject to the law of diminishing returns!•
Profit is the same at any given time in the economy !•
Profit is determined by the last (lowest quality) piece of land in cultivation!•
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Profit = Revenue - Cost (on the marginal piece of lent)!
Revenue - Cost - Profit = Rent!
This is known as the Theory of Differential Rent!•
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As an example, let wages = ws. We have economic growth, which leads to profit, increasing capital
accumulation. This increases nominal wages, which increases population, which increases the
demand for food !
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The price of food goes up and profits decrease!•
Rent is what is sometimes referred to as “producers’ surplus”, the area between the price of food •
and the supply curve (the red area)!
Rent = Price - Supply!◦
As the demand curve shifts out, rents increase for every landowner (green area)!•
As the economy continues to grow, eventually there will be no more arable land, meaning no •
profits for investments, which leads to economic growth choking itself off!
This is known as the “stationery state”!◦
This is because of the Corn Laws!◦
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Now to rethink this model WITHOUT the Corn Laws!
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Once domestic price hits the world price at X Britain will not farm any of its land but buy it from •
abroad!
The supply curve (blue line) therefore has a kink at point X!•
In this case, rents (red area) remain the same which means profits stop falling!•
Document Summary
Agriculture is subject to the law of diminishing returns. Pro t is the same at any given time in the economy. Pro t is determined by the last (lowest quality) piece of land in cultivation. Pro t = revenue - cost (on the marginal piece of lent) This is known as the theory of di erential rent. We have economic growth, which leads to pro t, increasing capital accumulation. This increases nominal wages, which increases population, which increases the demand for food. The price of food goes up and pro ts decrease. Rent is what is sometimes referred to as producers" surplus , the area between the price of food and the supply curve (the red area) As the demand curve shifts out, rents increase for every landowner (green area) As the economy continues to grow, eventually there will be no more arable land, meaning no pro ts for investments, which leads to economic growth choking itself o .
