Chapter 16. Rent, Interest, and Profit

Chapter 16Rent, Interest, and ProfitCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Economic RentPrice paid for land and other natural resources Perfectly inelasticity supplyChanges in demandA surplus paymentLO1Economic RentLand ownership: fairness vs. allocative efficiencyApplication: a single tax on landHenry George’s proposalSingle-tax movementCriticismsLO1LO1InterestPrice paid for use of moneyStated as a percentageMoney is not a resourceInterest rates and interest incomeRange of interest ratesRiskMaturityLoan sizeTaxability2LO2Loanable Funds TheoryExtending the modelFinancial institutionsChanges in supplyHousehold thriftChanges in demandRate of return on investmentOther participantsLO2LO3Time-Value of MoneyMoney is more valuable the sooner it is obtainedAbility to earn interestCompound interestFuture valuePresent valueLO3LO4Role of Interest RatesRelationship to:Total outputAllocation of capitalR&D spendingNominal and real ratesApplication: Usury LawsNonmarket rationingGainers and losersInefficiency3LO5Economic ProfitExplicit costsImplicit costsPure profitTotal revenue less explicit and implicit costsRole of the entrepreneurNormal profitLO4LO6Economic ProfitInsurable risksUninsurable risksChanges in economic environmentStructure of economyGovernment policyNew products of production methodsLO4LO6Economic ProfitProfit is compensation for bearing uninsurable risksSources of economic profitCreate new productsReduce production costsCreate and maintain a profitable monopolyLO4LO6Economic ProfitProfit rations entrepreneurshipProfit aids in resource allocationProfit and corporate stockholdersLO4LO6The Price of CreditEffective interest ratesDiscounting a loanRepaying a loan in installmentsEffects of compoundingTruth in Lending Act 1968Truth in Savings Act 1991Fees and teaser ratesLet the borrower bewareLO5