Rent, Interest, and Profit

1. 27 Rent, Interest, and Profit

2. Chapter Objectives • The Nature of Economic Rent and How It is Determined • About the Loanable Funds Theory of Interest Rates • How Interest Rates Vary Based on Risk, Maturity, Loan Size, and Taxability • Why Economic Profits Occur, and How Profits, Along With Losses, Allocate Resources Among Alternative Uses • The Share of U.S. Earnings Received by Each of the Factors of Production

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

4. Economic Rent The Determination of Land Rent S R1 D1 Land Rent (Dollars) R2 D2 R3 D3 b a 0 L0 Acres of Land D4

5. Economic Rent • Application: A Single Tax on Land • Henry George’s Proposal • Single Tax Movement • Criticisms • Productivity Differences and Rent Differences • Alternative Uses of Land

6. O 27.1 G 27.1 Interest • Stated as a Percentage • Money is Not a Resource • Loanable Funds Theory of Interest • Supply of Loanable Funds • Demand for Loanable Funds

7. Interest The Market for Loanable Funds S Interest Rate (Percent) i= 8% D 0 F0 Quantity of Loanable Funds

8. Interest • Extending the Model • Financial Institutions • Changes in Supply • Changes in Demand • Other Participants

9. Interest • Range of Interest Rates • Risk • Maturity • Loan Size • Taxability • Pure Rate of Interest

10. O 27.2 Interest • 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 • Nonmarket Rationing • Gainers and Losers • Inefficiency

11. GLOBAL PERSPECTIVE Interest Short-Term Nominal Interest Rates Selected Nations, 2005 0 2 4 6 8 10 Mexico Iceland New Zealand Hungary Australia United Kingdom South Korea United States Canada Sweden Japan 9.5 9.2 7.1 6.8 5.7 4.7 3.6 3.5 2.8 1.7 0.0 Source: Organization for Economic Development and Cooperation

12. Economic Profit • Explicit Costs • Implicit Costs • Economic or Pure Profit • Role of the Entrepreneur • Normal Profit

13. Economic Profit • 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

14. Economic Profit • Innovations and Profit • Monopoly and Profit • Functions of Profit • Profit and Total Output • Profit and Resource Allocation • Income Shares

15. Determining the Price of Credit Last Word • Effective Interest Rates Can Be Deceiving • Simple Interest Calculation • Discounting a Loan • Effects of Compounding • Truth in Lending Act 1968 • Truth in Savings Act 1991 • Predatory Lender Protections • Fees and Teaser Rates • Let the Borrower Beware

16. economic rent incentive function single-tax movement loanable funds theory of interest 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 Key Terms

17. Next Chapter Preview… Government And Market Failure Chapter 28!