RENT, INTEREST AND

PROFIT

1
 ECONOMIC RENT

• Price paid for land

and other natural
resources
• Perfectly inelastic
supply
• Changes in demand
• A surplus payment

2
 ECONOMIC RENT

• Land ownership:
fairness vs. allocative
efficiency
• Application: a single tax
on land
• - Henry George’s
proposal
• - Single Tax Movement
• - criticisms
3
 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
4
 LOANABLE FUND THEORY
• Extending the model
• Financial institutions
• Changes in Supply
• Household thrift
• Changes in demand
• Rate of return on
investment
• Other participants

5
 TIME-VALUE OF MONEY
• Money is more valuable
the sooner it is obtained
• Ability to earn interest
• Compound interest

• Future value : FV=PV (1 + 𝑖)𝑡

• Present value : PV= FV__
(1 + 𝑖)𝑡

6
 TIME-VALUE OF MONEY

1 2 3 4
Beginning Computation
Period Value Total Interest End Period
Value

P1000 (year 1) 1000(1.10)= 100 1100.00

1100.00
P1100 (year 2)

P1210 (year 3)

Computation: FV=PV (1 + 𝑖)𝑡

FV= future value, PV= present value, i= interest in decimal
form, t= time
Interest rate is at 10%
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 ROLE OF INTEREST RATES
• Relationship to:
• Total output
• Allocation of capital
• R&D spending
• Nominal and real rates
• Application: Usury Laws
• Non-market rationing
• Gainers and Losers
• Inefficiency

8
 ECONOMIC PROFIT
• Explicit costs
• Implicit costs
• Pure profit
• Total revenue less explicit
and implicit costs
• Role of the entrepreneur
• normal profit

9
 ECONOMIC PROFIT
• Insurable risks
• Uninsurable risks
• changes in economic
environment
• structure of economy
• government policy
• new products of production
method

10
 ECONOMIC PROFIT
• Profit is for bearing
uninsurable risks
• Sources of economic profit
• Create new products
• Reduce production costs
• Create and maintain a
profitable monopoly

11
 ECONOMIC PROFIT
• Profit rations entrepreneurship

• Profit aids in resource

allocation

• Profit and corporate

stockholders

12
End

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