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2023Ch14SumMcBr - Rent Interest and Profit Chapter 14...

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Rent, Interest and Profit Chapter 14
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Outline Land, natural resources and economic rent Non-renewable natural resources Renewable natural resources Private property rights and natural resource use Real capital The market for real capital Interest rate determination in general Specific interest rates The determination of economic profit
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Land, natural resources and economic rent Land is the factor of production that refers to natural resources. Agricultural land, oil, coal, iron ore, water, plants and animals are examples of resources that fall in this category. The economic return to land is called economic rent. Economic rent is the return above the opportunity cost for using land as a resource. An upward sloping supply curve for land reflects this opportunity cost (or transfer earnings). Any return above this supply curve would be the economic rent. If land space is fixed in supply, or perfectly inelastic, all revenues received would be economic rent because the opportunity cost is zero. An increase in the demand for land will increase the economic rent. A decrease in the demand for land will decrease economic rent.
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The market for non-renewable resources Non-renewable natural resources are exhaustible and can be used only once. Examples of non-renewable natural resources include oil, natural gas and coal. When the supply of a non-renewable natural resource decreases over time, such as with oil, the price will increase. An increase in the demand for a non-renewable natural resource will increase its price. With oil, for example, an increase in global demand will increase the price of oil and encourage oil producers to explore for more. On the other hand, if the demand for oil should decrease (with more fuel-efficient cars and other energy resources becoming more affordable with technology, for example), the price of oil will decrease.
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The market for renewable resources Renewable natural resources are non-exhaustible and can be replenished. Examples of renewable natural resources include forests, water and wildlife.
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