Rent, Interest, and Profit

29C H A P T E R

ECONOMIC RENT• The price paid for the use

of land and other natural resources, the supply of which is fixed …graphically

Lan

d R

ent

(do

llar

s)

Acres of Land

S

0

DETERMINATION OF LAND RENTChanges in the demand for land...

Inelastic Supply...

Lan

d R

ent

(do

llar

s)

Acres of Land

S

0

DETERMINATION OF LAND RENTChanges in the demand for land...

Inelastic Supply...combines withdemand...

D1

R1

Lan

d R

ent

(do

llar

s)

Acres of Land

S

0

DETERMINATION OF LAND RENTChanges in the demand for land...

Inelastic Supply...combines withdemand...

D1

to determine rent

Lan

d R

ent

(do

llar

s)

Acres of Land

R1

S

D2

D1R2

0

If demand decreases...

DETERMINATION OF LAND RENTChanges in the demand for land...

rent decreases.

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 RENTChanges in the demand for land...

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 RENTChanges in the demand for land...

...and decreases ...and decreases

Lan

d R

ent

(do

llar

s)

D3

Acres of Land

R1

S

D4

D2

D1R2

R3

0

DETERMINATION OF LAND RENTChanges in the demand for land...

If demand is so lowthat there is no rentdetermined, land issaid to be a free good,commanding no rent.

INTERESTThe Price Paid for the Use of MoneyStated as a Percentage

Money NOT a Resource

Rate Determination...

Supply of Loanable FundsDemand for Loanable Funds

Inte

rest

Rat

e, (

per

cen

t)

Quantity of Loanable Funds

LOANABLE FUNDSTHEORY OF INTEREST

i = 8%

D

F0

S

EXTENDING THE MODEL

Financial Institutions

Changes in Supply

Changes in Demand

Other Participants

economic rentincentive functionsingle-tax movementloanable funds theory of interestpure rate of interestnominal interest ratereal interest rate

usury lawsexplicit costsimplicit costseconomic or pure profitnormal profitstatic economy insurable risksuninsurable risks

ENDBACKCopyright McGraw-Hill/Irwin, 2005

Coming Next:

Chapter 30

GOVERNMENTAND

MARKET FAILURE