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Economic Rent and Interest Overview

This document discusses economic rent, interest, and profit. It defines economic rent as the price paid for land and natural resources, which have a perfectly inelastic supply. Interest is defined as the price paid for the use of money, usually stated as a percentage. Profit is the total revenue earned by a business minus both explicit and implicit costs, and it represents the reward for bearing uninsurable business risks.

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196 views13 pages

Economic Rent and Interest Overview

This document discusses economic rent, interest, and profit. It defines economic rent as the price paid for land and natural resources, which have a perfectly inelastic supply. Interest is defined as the price paid for the use of money, usually stated as a percentage. Profit is the total revenue earned by a business minus both explicit and implicit costs, and it represents the reward for bearing uninsurable business risks.

Uploaded by

Miles Away
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
  • Introduction
  • Economic Rent
  • Interest
  • Economic Profit
  • Conclusion

RENT, INTEREST AND

PROFIT

1
ECONOMIC RENT

• Price paid for land


and other natural
resources
• Perfectly inelastic
supply
• Changes in demand
• A surplus payment

2
ECONOMIC RENT

• Land ownership:
fairness vs. allocative
efficiency
• Application: a single tax
on land
• - Henry George’s
proposal
• - Single Tax Movement
• - criticisms
3
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
4
LOANABLE FUND THEORY
• Extending the model
• Financial institutions
• Changes in Supply
• Household thrift
• Changes in demand
• Rate of return on
investment
• Other participants

5
TIME-VALUE OF MONEY
• Money is more valuable
the sooner it is obtained
• Ability to earn interest
• Compound interest

• Future value : FV=PV (1 + 𝑖)𝑡


• Present value : PV= FV__
(1 + 𝑖)𝑡

6
TIME-VALUE OF MONEY

1 2 3 4
Beginning Computation
Period Value Total Interest End Period
Value

P1000 (year 1) 1000(1.10)= 100 1100.00


1100.00
P1100 (year 2)

P1210 (year 3)

Computation: FV=PV (1 + 𝑖)𝑡


FV= future value, PV= present value, i= interest in decimal
form, t= time
Interest rate is at 10%
7
ROLE OF INTEREST RATES
• Relationship to:
• Total output
• Allocation of capital
• R&D spending
• Nominal and real rates
• Application: Usury Laws
• Non-market rationing
• Gainers and Losers
• Inefficiency

8
ECONOMIC PROFIT
• Explicit costs
• Implicit costs
• Pure profit
• Total revenue less explicit
and implicit costs
• Role of the entrepreneur
• normal profit

9
ECONOMIC PROFIT
• Insurable risks
• Uninsurable risks
• changes in economic
environment
• structure of economy
• government policy
• new products of production
method

10
ECONOMIC PROFIT
• Profit is for bearing
uninsurable risks
• Sources of economic profit
• Create new products
• Reduce production costs
• Create and maintain a
profitable monopoly

11
ECONOMIC PROFIT
• Profit rations entrepreneurship

• Profit aids in resource


allocation

• Profit and corporate


stockholders

12
End

13

RENT, INTEREST AND PROFIT 1
• Price paid for land and other natural resources • Perfectly inelastic supply • Changes in demand • A surplus payment
• Land ownership: fairness vs. allocative efficiency • Application: a single tax on land • - Henry George’s proposal •
• Price paid for use of money • Stated as a percentage • Money is not a resource • Interest rates and interest income •
LOANABLE FUND THEORY • Extending the model • Financial institutions • Changes in Supply • Household thrift • Changes in
TIME-VALUE OF MONEY • Money is more valuable the sooner it is obtained • Ability to earn interest • Compound interest • F
TIME-VALUE OF MONEY 7 1 Beginning Period Value 2 Computation 3 Total Interest 4 End Period Value P1000 (year 1) 1000(1.1
ROLE OF INTEREST RATES • Relationship to: • Total output • Allocation of capital • R&D spending • Nominal and real rates
ECONOMIC PROFIT • Explicit costs • Implicit costs • Pure profit • Total revenue less explicit and implicit costs • Role
ECONOMIC PROFIT • Insurable risks • Uninsurable risks • changes in economic environment • structure of economy • gov

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