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Principles of Economics 2nd edition by Fred M Gottheil

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Presentation on theme: "Principles of Economics 2nd edition by Fred M Gottheil"— Presentation transcript:

1 Principles of Economics 2nd edition by Fred M Gottheil
PowerPoint Slides prepared by Ken Long ©1999 South-Western College Publishing

2 Chapter 17 Interest, Rent, & Profit 5/28/2018
©1999 South-Western College Publishing

3 This chapter discusses principles associated with
Marginal Physical Product of Capital & Marginal Revenue Product of Capital Loanable Funds & Equipment of Capital The Ethics of Earning Interest-Based Income Pure Rent, Differential Rent, & Location Rent Wage-related Rents Profit Interest Rate Determination The Present Value of Property ©1999 South-Western College Publishing

4 What is the Economic Problem?
We live in a world of scarce resources, yet people have unlimited wants, so how do we meet people’s wants and needs in a world of scarcity? ©1999 South-Western College Publishing

5 What are resources? Entrepreneurship - an innovative person who takes risks, sees opportunity, and builds a business Capital - a machine or tool used in the productive process Land - anything from the earth is a land resource Labor - directed and productive effort

6 What is a resource market?
Involves the demand and supply of resources, that is, land, labor, capital and entrepreneurship ©1999 South-Western College Publishing

7 How is the Resource Market different than the Product Market?
In the resource market, firms are demanders and households are suppliers ©1999 South-Western College Publishing

8 The factor incomes discussed in this chapter are:
Wages Rent Profit ©1999 South-Western College Publishing

9 What is the Marginal Revenue Product of Capital?
The change in total revenue that results from adding one more dollar of loanable funds to production ©1999 South-Western College Publishing

10 What are Loanable Funds?
Money that a firm employs to purchase the physical plant, equipment, and raw materials used in production ©1999 South-Western College Publishing

11 What is Capital Equipment?
The machinery a firm uses in production ©1999 South-Western College Publishing

12 What is Interest Rate? The price of loanable funds, expressed as an annual percentage return on a dollar of loanable funds ©1999 South-Western College Publishing

13 Why is the Marginal Revenue Product of Capital Curve negative?
Because the law of diminishing returns applies to capital ©1999 South-Western College Publishing

14 Marginal Revenue Product of Capital
Interest Rate Loanable Funds 1414 ©1999 South-Western College Publishing

15 What two factors determine the MRP of Capital?
Marginal Physical product of capital Price of the good MRP=MPP x P ©1999 South-Western College Publishing

16 What is Marginal Factor Cost?
MFC is the change in a firm’s total cost that results from adding one more unit of a factor to production ©1999 South-Western College Publishing

17 What is the MRP = MFC Rule?
©1999 South-Western College Publishing

18 A firm will continue adding loanable funds to production as long as its MRP is greater than or equal to the marginal cost of employing loanable funds, MFC ©1999 South-Western College Publishing

19 What is the Loanable Funds Market?
The market in which the demand for and supply of loanable funds determines the rate of interest ©1999 South-Western College Publishing

20 S D (MRP) Surplus Shortage Interest Rate Loanable Funds 20
©1999 South-Western College Publishing

21 D S2 S1 P2 P1 Q2 Q1 Decrease in Supply 2121
©1999 South-Western College Publishing

22 D S1 S2 P1 P2 Q1 Q2 Increase in Supply 2222
©1999 South-Western College Publishing

23 What is Present Value? The value today of the stream of expected future annual income a property generates ©1999 South-Western College Publishing

24 How is Present Value Computed?
Divide the annual income generated, R, by the rate of interest, r ©1999 South-Western College Publishing

25 PV = R/r 2525 ©1999 South-Western College Publishing

26 Why does a decrease in the interest rate increase the present value of property?
Because the lower the interest the more money is needed in savings to generate the same income ©1999 South-Western College Publishing

27 For a simple Loan Payment Calculator check out -
©1999 South-Western College Publishing

28 Why does the value of property increase with a Price Floor?
Because of the guaranteed price the product will receive ©1999 South-Western College Publishing

29 A Price Floor S Surplus P D 29 ©1999 South-Western College Publishing

30 What is Rent? The difference between what a resource receives and the cost of bringing the resource into being ©1999 South-Western College Publishing

31 What is Differential Land Rent?
Rent arising from differences in the cost of providing land ©1999 South-Western College Publishing

32 What is Location Rent? Rent arising from differences in land distances from the marketplace ©1999 South-Western College Publishing

33 For an historical prospective concerning land and property rights, check out -
©1999 South-Western College Publishing

34 What is a Wage-Related Rent?
The difference between what a worker receives and what it takes to bring the worker into production ©1999 South-Western College Publishing

35 What is Opportunity Cost?
That which is given up in the best alternative endeavor ©1999 South-Western College Publishing

36 What is Economic Rent? That portion of a resource’s earnings above its opportunity cost ©1999 South-Western College Publishing

37 If your wage rate is $10 but you would work for $8, what is your wage-related rent?
$2 ©1999 South-Western College Publishing

38 Economic Rent & Opportunity Cost
Wage $10 Economic Rent Opportunity Cost D $4 Hours of labor 100

39 Who is an Entrepreneur? A profit-seeking decision maker who organizes an enterprise and assumes the risk of its operation ©1999 South-Western College Publishing

40 What is Profit? Income earned by entrepreneurs
©1999 South-Western College Publishing

41 For an example of entrepreneurship, check out -
©1999 South-Western College Publishing

42 What is a resource market?
What is the Marginal Revenue Product of Capital? What are Loanable Funds? What is Capital Equipment? What is Interest Rate? What is Marginal Factor Cost? What is the Loanable Funds Market?

43 What is Present Value? What is Economic Rent? What is Differential Rent? What is Location Rent? What is a Wage Related Rent? What is Opportunity Cost? Who is an Entrepreneur? What is Profit?

44 END ©1999 South-Western College Publishing

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