In modern economic usage, rent is represented as
the difference between the total return to a factor of
production (land, labour, or capital) and its supply
price—that is, the minimum amount necessary to
attain its services.
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1. Perfect Competition: The theory assumes perfect competition in
product and factor markets, meaning there are many buyers and sellers
with no one having the power to influence prices.
2. Fixed Resources: It assumes a fixed quantity of resources (land, labor,
capital) in the economy.
3. z
3. Homogeneous Resources: Resources are assumed to be
homogeneous, meaning they are identical in quality and productivity
across different uses.
4. Constant Returns to Scale: The production function exhibits
constant returns to scale, implying that doubling all inputs will
exactly double the output.
5. Supply of land: Perfectly inelastic supply of land, suggesting
opportunity cost of land is 0.
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1. Assumption of Perfect Competition: Critics argue that the assumption of perfect
competition is unrealistic, as real-world markets often exhibit imperfections such as
monopolies, oligopolies, and imperfect information, which can distort factor
rewards.
2. Static Model: The Ricardian model is often criticized for being static and not
accounting for changes over time, such as technological advancements, shifts in
consumer preferences, or changes in factor endowments.
3. Homogeneous Resources: The assumption of homogeneous resources overlooks
the diversity and quality differences within factors like labor and capital, which can
impact their productivity and rewards.
6. z
4. Fixed Resources: In reality, resources are not fixed but can be expanded through
investment, technological progress, or changes in population, challenging the notion
of a fixed resource base.
5. Constant Returns to Scale: Some critics argue that constant returns to scale may
not hold universally, especially in industries with economies of scale or
diseconomies of scale.
6. Distributional Effects: The theory focuses on aggregate factor rewards but may
not address distributional issues, such as income inequality or disparities in wealth
distribution.
7. z
7. Inability to Explain Modern Economic Realities: As economies evolve with
globalization, technological change, and new forms of organization (like multinational
corporations), the Ricardian theory may struggle to fully explain the distribution of
income and wealth in modern economies.