Rent Interest Profits Chapter 29

Economic rent
A. applies to amounts above those required to keep factors
     employed at their current use, i.e., the factors' opportunity cost. 
      1. Since economists include a normal return on investment in costs,
          any profit represents rent, a surplus.
       2. Companies with monopoly power that results in profit receive economic rent.
B. Pure economic rent is the concept of economic rent applied to
     factors fixed in supply such as land and other natural resources.
C. Economic implications of pure economic rent 
    1. Supply is fixed, perfectly inelastic, and price therefore does not
         perform the incentive function of increasing quantity supplied.
    2. Socialist philosophers questioned whether pure economic rent should be paid.
        a. Originally free, owners of land receive pure economic rent which is a surplus. 
         b. Henry George wanted to tax rent away in 19th century America. 
            1) Called the single-tax movement, he wanted to replace
                 all taxes with one tax on land. 
            2) Three problems exist with this philosophy.
                a)  Land is not free to current owners.
              b) Capital improvements are necessary to make modern land useful.
                    c) Modern rent does perform a rationing function because land is of such differing quality.

Interest is the price paid for capital
   A. The price of capital goods (any person-made aid to production)
         will be analyzed.
    B. Our main concern will be the cost of the funds required to buy
         the physical goods, i.e., interest.
    C. Supply and demand for loanable funds determine Interest rates.
        1. Demand for funds is a function of individual, business, and
            government attitudes toward investment risk. 
            a. These attitudes determine the required rate of return an
                 asset must earn to be part of the production process. 
            b. The more the risk, the higher the required rate of return. 
        2. Supply of funds is a function of individual, business, and
             government saving and Federal Reserve policy.
    D. Characteristics of a loanable funds (debt) market
         1. Demand comes from the needs on individuals, business,
             and government to borrow for investments.
         2. Supply comes from the savings of individuals, business,
             our governments, and foreigners who loan us profits from
              trading with us.
         3.  During the 1980's a dramatic increase in the demand for
              loanable funds combined with a decrease in savings to
              yield a dramatic rise in real interest rates. This increase
              caused a decrease in business capital investment and
              slow economic growth. 

Enterprise and business profit
A. Economic profit is revenue minus explicit + implicit costs
     B. An amount greater than zero represents economic rent.
C. Entrepreneurs receive economic rent for these
         activities.
         1. Initiative
         2. Decision making 
         3. Innovation
         4. Risk taking
         5. Monopolizing markets
         6. Controlling Government
D. Modern methods of creating rent include
        1. domestic outsourcing
        2. inter-firm contracting
        3. growing importance of production networks to

E. Economic profit exists in expanding industries and
     will disappears as a result of competitive forces
     or result in social unrest. See