Chapter 29 Rent, Interest, and Profit
I. The concept of rent
Economists define rent as the amount above
that required to keep factors employed.
I. The concept of rent
A. Economic rent applies to amounts above those required to keep factors
employed at their current use, i.e., the factors' opportunity cost.
1. Since economists include a normal return on investment in costs,
profit represents rent.
2. Companies with monopoly power that results in profit receive
B. Pure economic rent is the concept of economic rent applied to
factors fixed in supply such as land and other natural resources.
C. Economic implications of pure economic rent
1. Supply is fixed, perfectly inelastic, and price therefore does not
perform the incentive function of increasing quantity supplied.
2. Socialist philosophers questioned whether pure economic rent should
a. Originally free, owners of land receive pure economic rent which is
b. Henry George wanted to tax rent away in 19th century America.
1) Called the single-tax movement, he wanted to replace
all taxes with one tax on land.
2) Three problems exist with this philosophy.
a) Land is not free to current owners.
b) Capital improvements are necessary to make modern
c) Modern rent does perform a rationing function because
land is of such differing quality.
3) Read Robert Clancy / The Story of the Georgist Movement
for the latest on this movement.
D. A modern demand schedule has land's rent derived from the
revenue it generates (MRPL). For those interested in finance, land
is valued at the present value of future income.
1. Rent Seek and You will Find is a current perspective of modern rent seekers.
2. The Compensation of Highly Paid Professionals: How Much Is Rent?
F. Check out AP Microeconomics Review Materials!
Instruments Increased Debt
Relative to GDP Corporate Profits Grew Dramatically,
Source is a good post WW2 analysis of rent.
II. Interest is the price paid for capital
A. The price of capital goods (any person-made aid to production) will be analyzed.
B. Our main concern will be the cost of the funds required to buy the physical goods, i.e., interest.
C. Interest rates are a function of supply and demand for loanable funds.
1. Demand for funds is a function of individual, business, and government attitudes toward investment risk.
a. These attitudes determine the required rate of return an asset must earn to be a viable part of the
b. The more the risk, the higher the required rate of return.
2. Supply of funds is a function of individual, business, and government saving and Federal Reserve policy.
D. The market for loanable funds (debt) may be depicted as follows.
1. Demand comes from the needs on individuals, business, and government to borrow for investments.
2. Supply comes from the savings of individuals, business, our governments, and foreigners who loan us
profits from trading with us.
3. During the 1980's a dramatic increase in the demand for loanable funds combined with a decrease in savings
to yield a dramatic rise in real interest rates. This increase caused a decrease in business capital investment and
slow economic growth.
III. Enterprise and business profit
A. Economic profit is revenue minus costs
(explicit + implicit).
B. An amount greater than zero represents
C. Entrepreneurs receive economic rent for
2. Decision making
4. Risk taking
5. Monopolizing markets
6. Controlling Government
D. In theory, economic profit, which exists in
expanding industries, eventually
disappears as a result of competitive forces.
The "carried interest rule" allows the managers of private-equity
funds (formerly called leveraged buyout firms) to call their 20% bonus
for success a capital gains rather than income. The bonus is in addition
to the 2% of assets they get as asset managers which is taxes at 35%.
One estimate has the carried interest as 1/3 of company profits.
US corporate governance is a bonus system based on profit so much is gained by lowering factor costs (wages, materials.. when price pressure increases while the German corporate governance system includes worker representation so wages are to some degree sheltered forum price pressures.
E. U.S is an entrepreneurial
Source The Economist Magazine 10/5/13
New book explains why business
investment has been low profits-prophet The Economist Magazine 10/5/13
G. Politics plays a role
Editors Note: After it was discovered that presidential candidate M. Romney's average tax bill runs under 15%, the rates were being questioned. While the poor pay little or no income tax, they pay 6.2% of wages up to an annual wage maximum ($110,100 in 2012) for Social Security and a tax of 1.45% of all wages for Medicare. The total of 7.64% can be doubled to 15.28% as employee portions are matched by employees. A near majority of the poor die before being able to collect Social Security and Medicare See
Source businessinsider.com Editor's Note: Given increased competition,
maintaining marquis has been amazing. We will see that wages bore much of the
cost with science helping some especially lately with frocking.
Profits Above Norm for 20 Years
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