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Rent, Interest, Profit

Rent, Interest, Profit. Economic rent: “the price paid for the use of land and other natural resources that are completely fixed in total supply”  perfectly inelastic supply No production cost: “free and nonreproducible gift of nature”

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Rent, Interest, Profit

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  1. Rent, Interest, Profit

  2. Economic rent: “the price paid for the use of land and other natural resources that are completely fixed in total supply” •  perfectly inelastic supply • No production cost: “free and nonreproducible gift of nature” • Land can be improved (clearing, drainage, irrigation) but these are capital improvements not increases in amount of land • For individual firms rent is a cost (to attract from other uses: farming vs. housing)

  3. S Productivity diff rent diff. Land rent ($) D1 D2 D3 Q D4

  4. Incentive Function • Upsloping S for labor, capital, entrepreneurial ability higher prices = incentive to provide more • Surplus payment: regardless of price, same amount of land •  Single-tax on land (Henry George): other taxes reduce efficiency replace all taxes w/single tax on land

  5. Interest • Price paid for money (Or, revenue earned from lending money) • Percentage; money NOT a resource: only used to acquire resources • Nominal vs. Real Interest Rate

  6. Loanable Funds Theory of Interest • Interest rate from supply and demand of funds available for lending, not total S+D for money • Supply (households): upsloping higher i more funds (“bribe” for giving up current consumption) • Demand (firms/gov’t): expected rate of return from investment in capital goods: downsloping bc fewer investments will have that level of return

  7. Role of IR • Total Output (lower higher) • Allocation of Capital: prices ration • But imperfections: prime rates • Level and Composition of R+D Spending: higher less; flows toward high rates of return

  8. Usury Laws • Price ceiling • 1) Nonmarket rationing to most creditworthy; black market • 2) Gainers (creditworthy and the mob) and Loser (bank shareholders) • 3) Inefficiency: 50-50 chance of getting loans

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