 |  Microeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley R. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson Polytechnic University
Rent, Interest, and Profits
Chapter HighlightsCHAPTER 16- Economic rent is the price paid for the use of land and other natural resources whose total supplies are fixed.
- Rent is a surplus payment that is socially unnecessary since land would be available to the economy even
without rental payments. The idea of land rent as a surplus payment gave rise to the single-tax movement
of the late nineteenth century.
- Differences in land rent result from differences in the fertility and climatic features of the land and difference
in location.
- Although land rent is a surplus payment rather than a cost to the economy as a whole, to individual firms
and industries, rental payments are correctly regarded as costs. These payments must be made to gain the
use of land, which has alternative uses.
- Interest is the price paid for the use of money. In the loanable funds theory, the equilibrium interest rate is
determined by the demand for and supply of loanable funds. Other things equal, an increase in the supply of
loanable funds reduces the equilibrium interest rate, whereas a decrease in supply increases it; increases in
the demand for loanable funds raise the equilibrium interest rate, whereas decreases in demand reduce it.
- Interest rates vary in size because loans differ as to risk, maturity, amount, and taxability; market imperfections
cause additional variations. The pure rate of interest is the interest rate on long-term, virtually riskless,
Government of Canada long-term bonds.
- The equilibrium interest rate influences the level of investment and helps ration financial and physical capital
to specific firms and industries. Similarly, this rate influences the size and composition of R&D spend-ing.
The real interest rate, not the nominal rate, is critical to investment and R&D decisions.
- Although designed to make funds available to low-income borrowers, usury laws tend to allocate credit to
high-income persons, subsidize high-income borrowers at the expense of lenders, and lessen the efficiency
with which loanable funds are allocated.
- Economic, or pure, profit is the difference between a firm's total revenue and the sum of its explicit and
implicit costs, the latter including a normal profit. Profit accrues to entrepreneurs for assuming the unin-surable
risks associated with organizing and directing economic resources and for innovating. Profit also
results from monopoly power.
- Profit expectations influence innovation and investment activities and, therefore, the economy's levels of
employment and economic growth. The basic function of profits and losses, however, is to allocate
resources in accord with consumers' preferences.
- The largest share of national income-about 70 percent-goes to labour, a share narrowly defined as
"wages and salaries." When labour's share is more broadly defined to include "proprietors' income," it rises
to about 80 percent of national income, leaving about 20 percent as capital's share.
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2002 McGraw-Hill Higher Education