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CHAPTER TWENTY-NINE RENT, INTEREST, AND PROFITS INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Explain what determines economic rent. 2. Explain why economic rent is a surplus payment. 3. Explain the single-tax theory and its criticisms. 4. Explain what determines rent differentials. 5. Explain how rent functions as a cost to the individual firm. 6. Describe how the interest rate is determined. 7. Explain how business firms make investment decisions. 8. Distinguish between nominal and real interest rates. 9. State five factors which may cause interest rates to differ. 10. 1Distinguish between economic, normal, and business profits. 11. Explain why profits are received by some firms and not by others. 12. List three sources of economic profits. 13. Describe the general function of profits. 14. Summarize the current relative shares of national income. 15. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Introduction A. Emphasis in previous two chapters was on labor markets, because wages and salaries account for about three-fourths of our national income. B. This chapter focuses on the other three sources of income—rent, interest, and profits—which compose the remaining one-fourth of our national income. II. Economic rent is the price paid for use of land and other natural resources which are completely fixed in supply. (Note that this definition differs from the everyday use of the term.) A. Perfectly inelastic supply of the resource is one unique feature of the supply side of the market that determines rent. Land has no production cost; it is a “free and nonreproducible gift of nature.” Its quantity does not change with price (with a few exceptions). B. Changes in demand therefore determine the amount of rent. This will be determined by several factors. (See Figure 29-1) 1. The price of the product grown on the land, 363
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Rent, Interest, and Profits 2. The productivity of the land, and 3. The prices of other resources combined with the land for production. C. Land rent is viewed as a surplus payment because it performs no incentive function to provide more supply; it is not necessary to ensure the availability of land. D. Some argue that rent should be taxed away, since it is unearned, or that land should be nationalized and owned by the state. 1. Henry George’s proposal for a single tax of up to 99 percent of land rent asserted that this tax could eliminate other taxes. This was very popular in the late 1800s. 2. Critics of the single-tax idea make several points. a. Current levels of government spending are too great to be supported by rent taxes. b. It is difficult to separate the rent component from other income resulting from the combined use of land with other resources. c.
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