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Chapter 14 - Rent, interest, and profit. After reading this chapter, you should be able to: Explain the nature of economic rent and how it is determined; describe the loanable funds theory of interest rates; demonstrate how interest rates relate to the time-value of money and vary based on risk, maturity, loan size, and taxability; relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses; list the share of U.S. earnings received by each of the factors of production. | Rent, Interest, and Profit Chapter 14 Chapter Objectives Economic rent The loanable funds theory Interest rate variation Economic profits Distribution of U.S. earnings 14- Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment 14- Determination of Land Rent Acres of Land Land Rent (Dollars) L0 D1 D2 D3 D4 S R1 R2 R3 0 a b 14- Economic Rent Application: a single tax on land Henry George’s proposal Single tax movement Criticisms Productivity differences Alternative uses of land 14- 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- Market For Loanable Funds Quantity of Loanable Funds Interest Rate (Percent) 0 D S i= 8% F0 The equilibrium interest rate 14- Loanable Funds Theory Extending the model Financial institutions Changes in supply Household thrift Changes in demand Rate of return on investment Other participants 14- Time-Value of Money Money more valuable the sooner it is obtained Ability to earn interest Compound interest Future value Present value 14- Range of Interest Rates There are many interest rates Why do interest rates differ? Risk Maturity Loan size Taxability Pure rate of interest 14- 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- Nominal Interest Rates Short-Term Interest Rate, 2007 New Zealand Hungary Mexico Australia United Kingdom United States South Korea Canada Sweden Switzerland Japan 0 2 4 6 8 10 Source: Organization for Economic Cooperation and Development 14- Economic Profit Explicit costs Implicit costs Pure profit Total revenue less explicit and implicit costs Role of the entrepreneur Normal profit 14- Sources of Economic Profit Static economy Risk and profit Insurable | Rent, Interest, and Profit Chapter 14 Chapter Objectives Economic rent The loanable funds theory Interest rate variation Economic profits Distribution of U.S. earnings 14- Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment 14- Determination of Land Rent Acres of Land Land Rent (Dollars) L0 D1 D2 D3 D4 S R1 R2 R3 0 a b 14- Economic Rent Application: a single tax on land Henry George’s proposal Single tax movement Criticisms Productivity differences Alternative uses of land 14- 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- Market For Loanable Funds Quantity of Loanable Funds Interest Rate (Percent) 0 D S i= 8% F0 The equilibrium interest rate 14- Loanable Funds Theory Extending the model Financial institutions Changes in supply Household thrift Changes in demand Rate of .
