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Rent, Interest, and Profit PowerPoint PPT Presentation


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Chapter 14. Rent, Interest, and Profit. Chapter Objectives. Economic rent The loanable funds theory Interest rate variation Economic profits Distribution of U.S. earnings. 14- 2. Economic Rent. Price paid for land and other natural resources Perfectly inelasticity supply

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Rent, Interest, and Profit

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Chapter 14

Rent, Interest, and Profit


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Chapter Objectives

  • Economic rent

  • The loanable funds theory

  • Interest rate variation

  • Economic profits

  • Distribution of U.S. earnings

14-2


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Economic Rent

  • Price paid for land and other natural resources

  • Perfectly inelasticity supply

  • Changes in demand

  • A surplus payment

14-3


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Determination of Land Rent

S

R1

D1

Land Rent (Dollars)

R2

D2

R3

D3

a

b

0

L0

Acres of Land

D4

14-4


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Economic Rent

  • Application: a single tax on land

    • Henry George’s proposal

    • Single tax movement

    • Criticisms

  • Productivity differences

  • Alternative uses of land

14-5


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Interest

  • Price paid for use of money

  • Stated as a percentage

  • Money is not a resource

  • Loanable funds theory

    • Supply of loanable funds

    • Demand for loanable funds

14-6


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Market For Loanable Funds

The equilibrium interest rate

S

Interest Rate (Percent)

i=

8%

D

0

F0

Quantity of Loanable Funds

14-7


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Loanable Funds Theory

  • Extending the model

  • Financial institutions

  • Changes in supply

    • Household thrift

  • Changes in demand

    • Rate of return on investment

  • Other participants

14-8


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Time-Value of Money

  • Money more valuable the sooner it is obtained

    • Ability to earn interest

    • Compound interest

  • Future value

  • Present value

14-9


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Range of Interest Rates

  • There are many interest rates

  • Why do interest rates differ?

    • Risk

    • Maturity

    • Loan size

    • Taxability

  • Pure rate of interest

14-10


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Role of the Interest Rate

  • Relationship to

    • Total output

    • Allocation of capital

    • R&D spending

  • Nominal and real rates

  • Application: Usury Laws

    • Nonmarket rationing

    • Gainers and losers

    • Inefficiency

14-11


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Nominal Interest Rates

Short-Term Interest Rate, 2007

0 2 4 6 8 10

New Zealand

Hungary

Mexico

Australia

United Kingdom

United States

South Korea

Canada

Sweden

Switzerland

Japan

Source: Organization for Economic Cooperation and Development

14-12


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Economic Profit

  • Explicit costs

  • Implicit costs

  • Pure profit

  • Total revenue less explicit and implicit costs

  • Role of the entrepreneur

    • Normal profit

14-13


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Sources of Economic Profit

  • Static economy

  • Risk and profit

    • Insurable and uninsurable risks

    • Changes in economic environment, structure of economy, government policy

  • Innovations and profit

  • Monopoly and profit

14-14


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Economic Profit

  • Functions of profit

    • Profit and total output

    • Profit and resource allocation

  • Income shares

    • Labor receives 70-80%

    • Rest is rent, interest, profit

14-15


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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 beware

14-16


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Key Terms

  • economic rent

  • incentive function

  • single-tax movement

  • loanable funds theory of interest

  • time-value of money

  • future value

  • present value

  • pure rate of interest

  • nominal interest rate

  • real interest rate

  • usury laws

  • explicit costs

  • implicit costs

  • economic or pure profit

  • normal profit

  • static economy

  • insurable risks

  • uninsurable risks

14-17


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Next Chapter Preview…

Natural Resource

and Energy

Economics

14-18


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