Ricardian Rent Theory Summary

History of Economics

Adam Smith (1723-1790) laid down the basis of what we know today as Economics through his book An Inquiry into the Nature and Causes of the Wealth of Nations. Smith is popular thanks to his principle of the “the invisible hand”. He was the first to state that nations are richer or not depending solely on their productivity.1

David Ricardo (1772-1823) introduced the law of comparative advantage through his foundation book On the Principle of Political Economy and Taxation. He is also regarded as the father of the Rent Theory.

The Ricardian Rent Theory states this: economic rent (net profit) is generated due to competitive factors that are limited in supply (uniqueness) and cannot easily be transferred from one company

Information costs also include uncertainty about the future; that is the limited knowledge of the outcome of a specific decision. The corn farmer might be able to know the current prices of corn on the market, whereas he or she knows little about the prices of corn in three or six month after the current season ends.

Just like information about the future is costly (uncertainty), so it is with information about the past. Information about the past performance of a resource is called the risk of the resource. If I want to book a plane ticket with a particular airline company, I would most likely want to know the accident history, in other words the flying risk of that particular company. As just emphasized, risk is about the past, while uncertainty is about he future.13 Most people would confuse risk and uncertainty for a simple reason: past failures tend to repeat themselves.

Beside information scarcity, businesses have to deal with the uniqueness of resources.14 For example, despite the advent of the airplane and the Internet, it is still today difficult for anyone to be present at two places at the same

Why should a Social Entrepreneur study economics? Studying economics helps Social Entrepreneurs gain the Economic Way of Thinking. What is the Economic Way of Thinking? It is a reasoning process focusing mainly on incentives motivating decision-making rather than on the outcome of decision-making.19

For example, a Social Entrepreneur having some knowledge of economics will not alarm anyone if one of the company’s products is not performing well on the market; he or she will only focus on answering the question why the customers are oriented towards other alternative products; the Social Entrepreneur will not fire his or her treasurer for stealing from the cash deposit but would want to institute new incentives that would prevent such action in the future.

At the level of a market, an industry or a company, economics, and more precisely microeconomics, helps understand the relationships between buyers’ decisions and sellers’ decisions; the relationships between demand and supply. Demand is measured by the quantity of goods purchased, whereas supply is measured by the quantity of goods manufactured and sold on the