Chapter 14: Rent, Interest, and Profit

Economic rent

The price paid for the use of land and other natural resources that are completely fixed in total supply

Incentive function

A high price provides an incentive to offer more of the resource, whereas a low price prompts resource suppliers to offer less

Single-tax movement

Henry George; economic rent could be heavily taxed, or even taxed away, without diminishing the available supply of land or, therefore, the productive potential of the economy as a whole

Loanable funds theory of interest

Explains the interest rate not in terms of the total supply of and demand for money but, rather, in terms of the supply of and demand for funds available for lending (and borrowing)

Time-value of money

A specific amount of money is more valuable to a person the sooner it is obtained

Future value

Amount to which some current amount of money will grow to as interest compounds over time; forward-looking

Present value

Today’s value of amount of money to be received in the future

Pure rate of interest

Best approximated by the interest paid on long-term, virtually riskless securities such as long-term bonds of the U.S. government (20-year Treasury bonds)

Nominal interest rate

The rate of interest expressed in dollars of current value

Real interest rate

Rate of interest expressed in purchasing power—dollars of inflation-adjusted value

Innovations

________ undertaken by entrepreneurs entail uncertainty and the possibility of losses, not just the potential for increased profit.

Usury laws

Specify a maximum interest rate at which loans can be made

Economic profit

What remains after all costs—both explicit and implicit costs, the latter including a normal profit—have been subtracted from a firm’s total revenue

Explicit costs

Payments made by firm to outsiders

Implicit costs

The monetary income the firm sacrifices when it uses resources that it owns, rather than supplying those resources to the market

Normal profit

Minimum payment necessary to retain the current line of production

Static economy

One in which the basic forces such as resource supplies, technological knowledge, and consumer tastes are constant and unchanging

Insurable risks

Avoid losses by paying annual fee to insurance company

Uninsurable risks

Uncontrollable and unpredictable changes in the demand and supply conditions facing the firm (and hence its revenues and costs)