Rent, Interest, and Profits
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Transcript of Rent, Interest, and Profits
Chapter 16Rent, Interest, and Profit
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
16-2
Economic Rent
• Price paid for land and other natural resources
• Perfectly inelasticity supply
• Changes in demand
• A surplus payment
LO1
16-3
Economic Rent
Acres of Land
Land
Ren
t (D
olla
rs)
L0
D1
D2
D3
D4
S
R1
R2
R3
0a b
LO1LO1
16-4
Economic Rent
• Land ownership: fairness vs. allocative efficiency• Application: a single tax on land• Henry George’s proposal• Single-tax movement• Criticisms
LO1
LO1
16-5
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
2LO2
16-6
Loanable Funds Theory
• Extending the model• Financial institutions• Changes in supply• Household thrift
• Changes in demand• Rate of return on investment
• Other participants
LO2LO3
16-7
Loanable Funds Theory
Quantity of Loanable Funds
Inte
rest
Rat
e (P
erce
nt)
0
D
S
i =8%
F0
The equilibrium interest rate
LO2LO3
16-8
Time-Value of Money
• Money is more valuable the sooner it is obtained
• Ability to earn interest
• Compound interest
• Future value
• Present value
LO3LO4
16-9
Time-Value of Money
LO3LO4
16-10
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
• Inefficiency3LO5
16-11
Global Perspective
LO3LO5
16-12
Economic Profit
• Explicit costs
• Implicit costs
• Pure profit
• Total revenue less explicit and implicit costs
• Role of the entrepreneur
• Normal profit
LO4LO6
16-13
Economic Profit
• Insurable risks
• Uninsurable risks
• Changes in economic environment
• Structure of economy
• Government policy
• New products of production methods
LO4LO6
16-14
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
LO4LO6
16-15
Economic Profit
• Profit rations entrepreneurship
• Profit aids in resource allocation
• Profit and corporate stockholders
LO4LO6
16-16
Income Shares
LO5LO7
16-17
The Price of Credit
• Effective interest rates
• Discounting a loan
• Repaying a loan in installments
• Effects of compounding
• Truth in Lending Act 1968
• Truth in Savings Act 1991
• Fees and teaser rates
• Let the borrower bewareLO5