1. 14 Rent, Interest, and Profit McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

3. Economic Rent Acres of Land Land Rent (Dollars) L0L0 D1D1 D2D2 D3D3 D4D4 S R1R1 R2R2 R3R3 0 a b LO1 14-3

4. 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

5. 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

6. 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

7. Loanable Funds Theory Quantity of Loanable Funds Interest Rate (Percent) 0 D S i = 8% F0F0 The equilibrium interest rate LO2 14-7

8. 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

9. 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

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

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

12. 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

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

14. Income Shares LO5 14-14