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Economic Rent Acres of Land Land Rent (Dollars) L0L0 D1D1 D2D2 D3D3 D4D4 S R1R1 R2R2 R3R3 0 a b LO1 14-3
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14
Rent, Interest, and Profit
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Rent
• Price paid for land and other natural resources
• Perfectly inelasticity supply• Changes in demand• A surplus payment
LO1 14-2
Economic Rent
Acres of Land
Land
Ren
t (D
olla
rs)
L0
D1
D2
D3
D4
S
R1
R2
R3
0a b
LO1 14-3
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
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
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
Loanable Funds Theory
Quantity of Loanable Funds
Inte
rest
Rat
e (P
erce
nt)
0
D
S
i =8%
F0
The equilibrium interest rate
LO2 14-7
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
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
Economic Profit
• Explicit costs• Implicit costs• Pure profit• Total revenue less explicit and
implicit costs• Role of the entrepreneur
• Normal profit
LO4 14-10
Economic Profit
• Insurable risks• Uninsurable risks
• Changes in economic environment• Structure of economy• Government policy• New products of production
methods
LO4 14-11
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
Economic Profit
• Profit rations entrepreneurship• Profit aids in resource allocation• Profit and corporate stockholders
LO4 14-13
Income Shares
LO5
Distribution of U.S. Income
Rents$268 (2% )
Interest$788 (7% )
Corporate Profits$1309 (12% )
Proprietors' Income$1041 (9% )Wages and
Salaries$7792 (70% )
14-14