Lecture Economics (19/e) - Chapter 14: Rent, interest, and profit

After reading this chapter, you should be able to: Explain the nature of economic rent and how it is determined; describe the loanable funds theory of interest rates; demonstrate how interest rates relate to the time-value of money and vary based on risk, maturity, loan size, and taxability; relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses; list the share of U.S. earnings received by each of the factors of production.

Rent, Interest, and Profit

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resources

Acres of Land

L 0

D 1

D 2

D 3

D 4

S

R 1

R 2

R 3

allocative efficiency

Interest

Loanable Funds Theory

Quantity of Loanable Funds

0

D

S

i = 8%

F 0

The equilibrium interest rate

is obtained

• Total output

• Allocation of capital

• R&D spending

• Nonmarket rationing

• Gainers and losers

• Inefficiency

implicit costs

methods

uninsurable risks

monopoly

Economic Profit

Distribution of U.S. I ncome

I nterest

Corporate  Profits

$1309  ( 12% )

Proprietors' 

I ncome

$1041  ( 9% )

Wages and  Salaries

$7792  ( 70% )