14

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

14-2

Economic Rent

Land Rent (Dollars)

R1

D1

R2

D2
R3
D3
a
0

b
L0

Acres of Land
D4

LO1

14-3

Economic Rent

Land ownership: fairness vs.

LO1

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

14-4

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

14-5

Loanable Funds Theory

Extending the model

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

14-6

Loanable Funds Theory

The equilibrium interest rate
Interest Rate (Percent)

i=
8%

D
0

F0

Quantity of Loanable Funds

LO2

14-7

Time-Value of Money

Money is more valuable the sooner it

LO3

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

14-8

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

14-9

Economic Profit

Explicit costs
Implicit costs
Pure profit
Total revenue less explicit and

LO4

implicit costs
Role of the entrepreneur
Normal profit
14-10

Economic Profit

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

14-11

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

14-12

Economic Profit

Profit rations entrepreneurship

Profit aids in resource allocation
Profit and corporate stockholders

LO4

14-13

Income Shares
Distribution of U.S. Income
Proprietors'
Income
$1041
(9%)

Wages and
Salaries
$7792
(70%)

Corporate
Profits
$1309
(12%)

Interest
$788
(7%)
Rents
$268
(2%)
LO5

14-14