17

Rent, Interest, and Profit

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Economic Rent

Price paid for land and other natural

LO1

resources
Perfectly inelasticity supply
Changes in demand
A surplus payment

Economic Rent

Land Rent (Dollars)

R1
D1

R2

D2

R3

D3
0

b
L0

Acres of Land
D4

LO1

Economic Rent

Land ownership: fairness vs.

LO1

allocative efficiency
Application: a single tax on land
Henry Georges proposal
Single tax movement
Criticisms

Interest

Price paid for use of money

Stated as a percentage
Money is not a resource
Interest rates and interest income
Range of interest rates
Risk
Maturity
Loan size
Taxability
LO2

Loanable Funds Theory

Extending the model

Financial institutions
Changes in supply
Household thrift
Changes in demand
Rate of return on investment
Other participants
LO2

Loanable Funds Theory

The equilibrium interest rate
Interest Rate (Percent)

i=
8%

D
0

F0

Quantity of Loanable Funds

LO2

Time-Value of Money

Money is more valuable the sooner it

LO3

is obtained
Ability to earn interest
Compound interest
Future value
Present value

Time-Value of Money
(1)

(2)

(3)

(4)

Beginning
Period Value

Computation

Total Interest

End Period Value

$1000 (Year 1)

$1000 X 1.10 = $1100

$100

$1100 (=$1000 + $100)

$1100 (Year 2)

$1100 X 1.10 = $1210

$210 (=$100 +$110)

$1210(=$1000 + $210)

$1210 x 1.10 = $1331

$331 (= $100 + $110+

$121)

$1331(=$1000 + $331)

$1210 (Year 3)

LO3

Role of Interest Rates

Relationship to:
Total output
Allocation of capital
R&D spending

Nominal and real rates

Application: Usury Laws
Nonmarket rationing
Gainers and losers
Inefficiency
LO3

Global Perspective

LO3

Economic Profit

Explicit costs
Implicit costs
Pure profit
Total revenue less explicit and

LO4

implicit costs
Role of the entrepreneur
Normal profit

Economic Profit

Insurable risks
Uninsurable risks
Changes in economic environment
Structure of economy
Government policy
New products of production
methods
LO4

Economic Profit

Profit is compensation for bearing

LO4

uninsurable risks
Sources of economic profit
Create new products
Reduce production costs
Create and maintain a profitable
monopoly

Economic Profit

Profit rations entrepreneurship

Profit aids in resource allocation
Profit and corporate stockholders

LO4