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Economic Rent Determination of Land Rent Land Rent: A Surplus Payment Interest 16 C HAPTE R Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 16 - 1 Next Slide Rent, Interest, and Profit Copyright McGraw-Hill/Irwin, 2005 ECONOMIC RENT 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 Previous Slide End Show 16 - 2 Next Slide Fixed Total Supply Perfectly Inelastic Supply Changes in Demand Free Goods Determination of Land Rent …graphically Copyright McGraw-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 16 - 3 Next Slide Inelastic Supply... Land Rent (dollars) Land Rent: A Surplus Payment S 0 Copyright McGraw-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 16 - 4 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S Inelastic Supply... combines with demand... D1 0 Copyright McGraw-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 16 - 5 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R1 Inelastic Supply... combines with demand... to determine rent D1 0 Copyright McGraw-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 16 - 6 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S If demand decreases... rent decreases. R1 R2 D1 D2 0 Copyright McGraw-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 16 - 7 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R1 If demand decreases... rent decreases. ...and decreases R2 D1 R3 D2 D3 0 Copyright McGraw-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 16 - 8 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R1 If demand decreases... rent decreases. ...and decreases ...and decreases R2 D1 R3 D2 D3 0 Copyright McGraw-Hill/Irwin, 2005 D4 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 16 - 9 Next Slide Land Rent (dollars) Land Rent: A Surplus Payment S R1 If demand is so low that there is no rent determined, land is said to be a free good, commanding no rent. R2 D1 R3 D2 D3 0 Copyright McGraw-Hill/Irwin, 2005 D4 Acres of Land LAND RENT: A SURPLUS PAYMENT 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 Previous Slide End Show 16 - 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 McGraw-Hill/Irwin, 2005 LAND RENT: A SURPLUS PAYMENT Economic Rent Determination of Land Rent Land Rent: A Surplus Payment Interest Productivity Differences Rent Differences Loanable Funds Theory of Interest Range of Interest Rates Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 16 - 11 Next Slide Alternative Uses and Costs Society’s Perspective of Rent as a Cost Versus that of the Individual Copyright McGraw-Hill/Irwin, 2005 INTEREST 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 Previous Slide End Show 16 - 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 McGraw-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 16 - 13 Interest Rate, (percent) Determination of Land Rent i= 8% D Next Slide F0 Quantity of Loanable Funds Copyright McGraw-Hill/Irwin, 2005 EXTENDING THE MODEL Economic Rent Determination of Land Rent Financial Institutions Land Rent: A Surplus Payment Interest Loanable Funds Theory of Interest Changes in Supply Range of Interest Rates Application: Usury Laws Economic Profit Changes in Demand Key Terms Previous Slide End Show 16 - 14 Next Slide Other Participants Copyright McGraw-Hill/Irwin, 2005 RANGE OF INTEREST RATES 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 Market Imperfections Key Terms Previous Slide End Show 16 - 15 Risk Maturity Loan Size Taxability Next Slide Copyright McGraw-Hill/Irwin, 2005 RANGE OF INTEREST RATES 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 Previous Slide End Show 16 - 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 McGraw-Hill/Irwin, 2005 GLOBAL PERSPECTIVE 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 Previous Slide End Show 16 - 17 Next Slide Short-Term Nominal Interest Rates, Selected Nations, 2002 Hungary Poland Mexico Australia South Korea Sweden United Kingdom Greece Canada United States Japan 0 2% 4% 6% 8% 10% Source: Organization for Economic Cooperation and Development Copyright McGraw-Hill/Irwin, 2005 APPLICATION: USURY LAWS Economic Rent Determination of Land Rent 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 16 - 18 Inefficiency Next Slide Copyright McGraw-Hill/Irwin, 2005 Economic Rent Determination of Land Rent Land Rent: A Surplus Payment Interest ECONOMIC PROFIT Explicit Costs Implicit Costs Loanable Funds Theory of Interest Range of Interest Rates Economic or Pure Profit Application: Usury Laws Economic Profit Key Terms Previous Slide End Show 16 - 19 Next Slide Role of the Entrepreneur Normal Profit Copyright 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 Previous Slide End Show 16 - 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 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 Previous Slide End Show 16 - 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 McGraw-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 McGraw-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 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 16 - 23 Next Slide Chapter 17 Copyright McGraw-Hill/Irwin, 2005
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