1. Ch 27 Rent, Interest, & Profit

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

3. Economic Rent The Determination of Land Rent Acres of Land Land Rent (Dollars) L0L0 D1D1 D2D2 D3D3 D4D4 S R1R1 R2R2 R3R3 0 a b -- What is the value of land at each Demand curve?

4. B.Henry George Proposed a Single-Tax on land Progress and Poverty (1879) Economic rent could be heavily taxed without diminishing the available supply of land or economy as a whole. Land performs no incentive function Critics cite many problems w/ this. The supply of land is perfectly inelastic

5. C.Interest Stated as a Percentage Money is Not a Resource Loanable Funds Theory of Interest Supply of Loanable Funds Demand for Loanable Funds -- Loanable Funds Theory: S&D for funds available for lending (and borrowing).

6. Interest The Market for Loanable Funds Quantity of Loanable Funds Interest Rate (Percent) 0 D S i= 8% F0F0

7. Interest, cont’d Extending the Model –Financial Institutions –Changes in Supply –Changes in Demand –Other Participants

8. Interest, cont’d Range of Interest Rates –Risk –Maturity –Loan Size –Taxability Pure Rate of Interest

9. Interest, cont’d Role of the Interest Rate –Interest and Total Output –Interest and the Allocation of Capital –Interest and R&D Spending –Nominal and Real Interest Rates Application: Usury Laws (next slide) –Nonmarket Rationing –Gainers and Losers –Inefficiency

10. Usury Laws Quantity of Loanable Funds Interest Rate (Percent) 0 D S i= 8% F0F0 Usury Laws specify a max interest rate for loans (price ceiling).

11. D.Economic Profit Explicit Costs Implicit Costs Economic or Pure Profit Role of the Entrepreneur –Normal Profit

12. Economic Profit, cont’d 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

13. Economic Profit, cont’d Innovations and Profit Monopoly and Profit Functions of Profit –Profit and Total Output –Profit and Resource Allocation

14. Income Shares