27 Rent, Interest, and Profit

Chapter Objectives The Nature of Economic Rent and How It is Determined About the Loanable Funds Theory of Interest Rates How Interest Rates Vary Based on Risk, Maturity, Loan Size, and Taxability Why Economic Profits Occur, and How Profits, Along With Losses, Allocate Resources Among Alternative Uses The Share of U.S. Earnings Received by Each of the Factors of Production

Economic Rent Economic Rent Perfectly Inelasticity Supply Changes in Demand Land Rent: A Surplus Payment Incentive Function

Economic Rent The Determination of Land Rent Land Rent (Dollars) b L0 Acres of Land D4

Economic Rent Application: A Single Tax on Land Henry George’s Proposal Single Tax Movement Criticisms Productivity Differences and Rent Differences Alternative Uses of Land

Interest Stated as a Percentage Money is Not a Resource Loanable Funds Theory of Interest Supply of Loanable Funds Demand for Loanable Funds G 27.1 O 27.1

Interest The Market for Loanable Funds Interest Rate (Percent) 8% D F0 Quantity of Loanable Funds

Interest Extending the Model Financial Institutions Changes in Supply Changes in Demand Other Participants

Interest Range of Interest Rates Pure Rate of Interest Risk Maturity Loan Size Taxability Pure Rate of Interest

Interest Role of the Interest Rate Application: Usury Laws Interest and Total Output Interest and the Allocation of Capital Interest and R&D Spending Nominal and Real Interest Rates Application: Usury Laws Nonmarket Rationing Gainers and Losers Inefficiency O 27.2

Interest Short-Term Nominal Interest Rates Selected Nations, 2005 GLOBAL PERSPECTIVE 0 2 4 6 8 10 Mexico Iceland New Zealand Hungary Australia United Kingdom South Korea United States Canada Sweden Japan 9.5 9.2 7.1 6.8 5.7 4.7 3.6 3.5 2.8 1.7 0.0 Source: Organization for Economic Development and Cooperation

Economic Profit Explicit Costs Implicit Costs Economic or Pure Profit Role of the Entrepreneur Normal Profit

Economic Profit Sources of Economic Profit Static Economy Risk and Profit Insurable Risks Uninsurable Risks Changes in General Economic Environment Changes in the Structure of the Economy Changes in Government Policy

Economic Profit Innovations and Profit Monopoly and Profit Functions of Profit Profit and Total Output Profit and Resource Allocation Income Shares

Determining the Price of Credit Last Word Effective Interest Rates Can Be Deceiving Simple Interest Calculation Discounting a Loan Effects of Compounding Truth in Lending Act 1968 Truth in Savings Act 1991 Predatory Lender Protections Fees and Teaser Rates Let the Borrower Beware

Key Terms economic rent incentive function single-tax movement loanable funds theory of interest pure rate of interest nominal interest rate real interest rate usury laws explicit costs implicit costs economic or pure profit normal profit static economy insurable risks uninsurable risks

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