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Chapter 29 Rent, Interest, and Profit To Print from an Internet browser, set type size to Smaller by choosing View, Text Size and Smaller, and choose File and Print. You may also need to set the margins to 0.25 inches.    Our Economics Learning Center has information for students, teachers, an professionals. Telling Teachers about these free learning materials and our site http://www.textbooksfree.org/ might help lower the cost of textbooks.

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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 economic rent.
    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 be paid.
            a. Originally free, owners of land receive pure economic rent which is a surplus. 
            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 land useful.
                     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 (MRP_L). 
          For those interested in finance,  land is valued at the present value of future income.
     E. Check out AP Microeconomics Review Materials!

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 production process. 
              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.

Business Cycle	30-Year Treasury Yields (%)	Inflation  Rate %	Real Yields %
01/54 to 10/57	3.05	1.57	1.48
11/57 to 04/60	3.93	2.23	1.70
05/60 to 11/69	4.68	2.17	2.51
12/69 to 10/73	6.57	4.53	2.04
11/73 to 12/79	8.27	7.25	1.02
01/80 to 06/81	12.01	9.25	2.76
07/81 to 05/89	9.30	4.55	4.75
Source: Kleinwort Benson Government Securities Inc. as published in The Wall Street Journal and the author's notes for 04/96
Recent year-end real yields from Economics Internet Library
04/96	6.83	3.33	3.5
12/01	5.49	2.8	2.69
12/02	5.4	2.2	3.2

 

III. Enterprise and business profit       A. Economic profit is revenue minus costs           (explicit + implicit).       B. An amount greater than zero represents           economic rent.       C. Entrepreneurs receive economic rent for            these activities.            1. Initiative            2. Decision making             3. Innovation            4. Risk taking            5. Monopolizing markets            6. Controlling Government      D. In theory, conomic profit, which exists in           expanding industries, eventually disappears           as a result of competitive forces.