Rent, Interest, and Profit Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Price paid for land and other natural resources Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment LO1 14-2

Economic Rent Land Rent (Dollars) Acres of Land S R1 D1 R2 D2 R3 D3 a b L0 Acres of Land D4 LO1 14-3

Land ownership: fairness vs. allocative efficiency Economic Rent Land ownership: fairness vs. allocative efficiency Application: a single tax on land Henry George’s proposal Single tax movement Criticisms LO1 14-4

Price paid for use of money Stated as a percentage 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

Financial institutions Changes in supply Household thrift 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

The equilibrium interest rate Loanable Funds Theory The equilibrium interest rate S Interest Rate (Percent) i = 8% D F0 Quantity of Loanable Funds LO2 14-7

Money is more valuable the sooner it is obtained Time-Value of Money Money is more valuable the sooner it is obtained Ability to earn interest Compound interest Future value Present value LO3 14-8

Application: Usury laws 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

Total revenue less explicit and implicit costs Economic Profit Explicit costs Implicit costs Pure profit Total revenue less explicit and implicit costs Role of the entrepreneur Normal profit LO4 14-10

Changes in economic environment Structure of economy Government policy Economic Profit Insurable risks Uninsurable risks Changes in economic environment Structure of economy Government policy New products of production methods LO4 14-11

Profit is compensation for bearing uninsurable risks Economic Profit Profit is compensation for bearing uninsurable risks Sources of economic profit Create new products Reduce production costs Create and maintain a profitable monopoly LO4 14-12

Profit rations entrepreneurship Profit aids in resource allocation Economic Profit Profit rations entrepreneurship Profit aids in resource allocation Profit and corporate stockholders LO4 14-13

Income Shares LO5 14-14