Economic Rent Determination of Land Rent A Surplus

Economic Rent Determination of Land Rent: A Surplus Payment Interest 29 CHAPTER Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 1 Next Slide Rent, Interest, and Profit Copyright Mc. Graw-Hill/Irwin, 2005

ECONOMIC RENT Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 2 Next Slide Fixed Total Supply Perfectly Inelastic Supply Changes in Demand Free Goods Determination of Land Rent …graphically Copyright Mc. Graw-Hill/Irwin, 2005

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 3 Next Slide Inelastic Supply. . . Land Rent (dollars) Land Rent: A Surplus Payment S 0 Copyright Mc. Graw-Hill/Irwin, 2005 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 4 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S Inelastic Supply. . . combines with demand. . . D 1 0 Copyright Mc. Graw-Hill/Irwin, 2005 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 5 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R 1 Inelastic Supply. . . combines with demand. . . to determine rent D 1 0 Copyright Mc. Graw-Hill/Irwin, 2005 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 6 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S If demand decreases. . . rent decreases. R 1 R 2 D 1 D 2 0 Copyright Mc. Graw-Hill/Irwin, 2005 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 7 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R 1 If demand decreases. . . rent decreases. . and decreases R 2 D 1 R 3 D 2 D 3 0 Copyright Mc. Graw-Hill/Irwin, 2005 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 8 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R 1 If demand decreases. . . rent decreases. . and decreases R 2 D 1 R 3 D 2 D 3 0 Copyright Mc. Graw-Hill/Irwin, 2005 D 4 Acres of Land

DETERMINATION OF LAND RENT Economic Rent Changes in the demand for land. . . Determination of Land Rent Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 9 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R 1 If demand is so low that there is no rent determined, land is said to be a free good, commanding no rent. R 2 D 1 R 3 D 2 D 3 0 Copyright Mc. Graw-Hill/Irwin, 2005 D 4 Acres of Land

LAND RENT: A SURPLUS PAYMENT Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 10 Next Slide An Incentive Function A Single Tax on Land • A Socialistic Position Henry George’s Proposal • Single-Tax Movement (Nineteenth Century) Criticisms Copyright Mc. Graw-Hill/Irwin, 2005

LAND RENT: A SURPLUS PAYMENT Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 11 Next Slide Productivity Differences Rent Differences Alternative Uses and Costs Society’s Perspective of Rent as a Cost Versus that of the Individual Copyright Mc. Graw-Hill/Irwin, 2005

INTEREST Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 12 Next Slide The Price Paid for the Use of Money Stated as a Percentage Money NOT a Resource Supply of Loanable Funds Demand for Loanable Funds Rate Determination. . . Copyright Mc. Graw-Hill/Irwin, 2005

LOANABLE FUNDS THEORY OF INTEREST S Economic Rent Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 13 Interest Rate, (percent) Determination of Land Rent i= 8% D Next Slide F 0 Quantity of Loanable Funds Copyright Mc. Graw-Hill/Irwin, 2005

EXTENDING THE MODEL Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 14 Next Slide Financial Institutions Changes in Supply Changes in Demand Other Participants Copyright Mc. Graw-Hill/Irwin, 2005

RANGE OF INTEREST RATES Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 15 Risk Maturity Loan Size Taxability Market Imperfections Next Slide Copyright Mc. Graw-Hill/Irwin, 2005

RANGE OF INTEREST RATES Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 16 Next Slide Pure Rate of Interest Role of the Interest Rate • Interest and Total Output • Interest and the Allocation of Capital • Interest and R&D Spending • Nominal and Real Interest Rates Copyright Mc. Graw-Hill/Irwin, 2005

GLOBAL PERSPECTIVE Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 17 Next Slide Short-Term Nominal Interest Rates, Selected Nations, 2002 0 Hungary Poland Mexico Australia South Korea Sweden United Kingdom Greece Canada United States Japan 2% 4% 6% 8% 10% Source: Organization for Economic Cooperation and Development Copyright Mc. Graw-Hill/Irwin, 2005

APPLICATION: USURY LAWS Economic Rent Determination of Land Rent: A Surplus Payment Nonmarket Rationing Interest Loanable Funds Theory of Interest Range of Interest Rates Gainers and Losers Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 18 Next Slide Inefficiency Copyright Mc. Graw-Hill/Irwin, 2005

Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 19 Next Slide ECONOMIC PROFIT Explicit Costs Implicit Costs Economic or Pure Profit Role of the Entrepreneur Normal Profit Copyright Mc. Graw-Hill/Irwin, 2005

Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 20 Next Slide ECONOMIC PROFIT Sources of Economic Profit • Static Economy • Risk and Profit • Insurable Risks • Uninsurable Risks • Changes in Economy • Structural Changes • Government Policy Copyright Mc. Graw-Hill/Irwin, 2005

Economic Rent Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 29 - 21 Next Slide ECONOMIC PROFIT Innovations and Profit Monopoly and Profit Functions of Profit • Profit and Total Output • Profit and Resource Allocation Income Shares Copyright Mc. Graw-Hill/Irwin, 2005

economic rent incentive function single-tax movement loanable funds theory of interest pure rate of interest nominal interest rate real interest rate Copyright Mc. Graw-Hill/Irwin, 2005 usury laws explicit costs implicit costs economic or pure profit normal profit static economy insurable risks uninsurable risks BACK END

Economic Rent Coming Next: Determination of Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit GOVERNMENT AND MARKET FAILURE Key Terms Previous Slide End Show 29 - 23 Next Slide Chapter 30 Copyright Mc. Graw-Hill/Irwin, 2005