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16 - 1Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Rent, Interest, and Profit
16C H A P T E R
16 - 2Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIC RENTFixed Total SupplyPerfectly Inelastic
SupplyChanges in DemandFree GoodsDetermination of Land
Rent …graphically
16 - 3Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
Acres of Land
S
0
DETERMINATION OF LAND RENT
Changes in the demand for land...
Inelastic Supply...
16 - 4Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
Acres of Land
S
0
DETERMINATION OF LAND RENT
Changes in the demand for land...
Inelastic Supply...combines withdemand...
D1
16 - 5Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
R1
Lan
d R
ent
(do
llar
s)
Acres of Land
S
0
DETERMINATION OF LAND RENT
Changes in the demand for land...
Inelastic Supply...combines withdemand...
D1
to determine rent
16 - 6Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
Acres of Land
R1
S
D2
D1R2
0
If demand decreases...
DETERMINATION OF LAND RENT
Changes in the demand for land...
rent decreases.
16 - 7Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
D3
Acres of Land
R1
S
D2
D1R2
R3
0
If demand decreases...rent decreases. ...and decreases
DETERMINATION OF LAND RENT
Changes in the demand for land...
16 - 8Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
D3
Acres of Land
R1
S
D4
D2
D1R2
R3
0
If demand decreases...rent decreases. ...and decreases
DETERMINATION OF LAND RENT
Changes in the demand for land...
...and decreases ...and decreases
16 - 9Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Lan
d R
ent
(do
llar
s)
D3
Acres of Land
R1
S
D4
D2
D1R2
R3
0
DETERMINATION OF LAND RENT
Changes in the demand for land...If demand is so lowthat there is no rentdetermined, land issaid to be a free good,commanding no rent.
16 - 10Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
A Single Tax on Land•A Socialistic Position
Henry George’s Proposal•Single-Tax Movement (Nineteenth Century)
Criticisms
LAND RENT: A SURPLUS PAYMENT
An Incentive Function
16 - 11Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Productivity Differences
Alternative Uses and Costs
LAND RENT: A SURPLUS PAYMENT
Rent Differences
Society’s Perspective ofRent as a Cost Versus thatof the Individual
16 - 12Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
INTERESTThe Price Paid for the Use of Money
Stated as a Percentage
Money NOT a Resource
Rate Determination...
Supply of Loanable FundsDemand for Loanable Funds
16 - 13Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Inte
rest
Rat
e, (
per
cen
t)
Quantity of Loanable Funds
LOANABLE FUNDSTHEORY OF INTEREST
i = 8%
D
F0
S
16 - 14Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
EXTENDING THE MODEL
Financial Institutions
Changes in Supply
Changes in Demand
Other Participants
16 - 15Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
RANGE OF INTEREST RATES
RiskMaturityLoan SizeTaxabilityMarket Imperfections
16 - 16Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
RANGE OF INTEREST RATES
Pure Rate of InterestRole of the Interest Rate
•Interest and Total Output•Interest and the Allocation of Capital
•Interest and R&D Spending•Nominal and Real Interest Rates
16 - 17Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
0 2% 4% 6% 8% 10%Hungary
PolandMexico
AustraliaSouth Korea
SwedenUnited Kingdom
GreeceCanada
United StatesJapan
GLOBAL PERSPECTIVEShort-Term Nominal Interest Rates,Selected Nations, 2002
Source: Organization for Economic Cooperation and Development
16 - 18Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
APPLICATION: USURY LAWS
Nonmarket Rationing
Gainers and Losers
Inefficiency
16 - 19Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIC PROFIT
Explicit Costs
Implicit Costs
Economic or Pure Profit
Role of the Entrepreneur
Normal Profit
16 - 20Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIC PROFITSources of Economic Profit
•Static Economy•Risk and Profit•Insurable Risks•Uninsurable Risks
•Changes in Economy•Structural Changes•Government Policy
16 - 21Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIC PROFITInnovations and ProfitMonopoly and ProfitFunctions of Profit
•Profit and Total Output•Profit and Resource Allocation
Income Shares
economic rent
incentive function
single-tax movement
loanable funds theory of interest
pure rate of interest
nominal interest rate
real interest rate
usury lawsexplicit costsimplicit costseconomic or pure profitnormal profitstatic economy insurable risksuninsurable risks
ENDBACKCopyright McGraw-Hill/Irwin, 2005
16 - 23Copyright McGraw-Hill/Irwin, 2005
Economic Rent
Determination of Land Rent
Land Rent: A Surplus Payment
Interest
Loanable Funds Theory of Interest
Range of Interest Rates
Application: Usury Laws
Economic Profit
Key Terms
PreviousSlide
NextSlide
EndShow
Coming Next:
Chapter 17
GOVERNMENTAND
MARKET FAILURE
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