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lectur5-page22 - No hassles no worries This is just another...

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22 22 Owners of resources receive payments u LAND receives RENT u CAPITAL receives INTEREST u LABOR receives WAGES u MANAGEMENT receives PROFIT The payment land receives is referred to as rent. When you let someone else use land that you own, your receive rent. What about when you use land that you own to produce a commodity, do you incur any economic cost? Yes, you do. The cost is an opportunity cost. The next best alternative to using your land to produce a commodity, is to “rent” the land to someone else. If you were to grow a crop of corn on your land, and you calculated your return to be $35 per acre, but you could have rented that land to a neighbor for $40 per acre, did you really make a profit? I don’t think so. I think you lost $5 per acre. Just think about it. You could have rented that land out, popped a cold one, and relaxed the whole growing season with $40 per acre in your pocket.
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Unformatted text preview: No hassles, no worries. This is just another way to look at the many ways to consider your alternative uses of resources that you control. The return to capital is referred to as interest. Yes, interest. If you use $10,000 that you have saved to purchase a used backhoe and front-end loader, what have you given up the opportunity to earn on your $10,000? Yes, the interest you could have earned on that money had you left it in the bank. So before you purchase that backhoe and front-end loader, you better pencil your decision out to ensure that the backhoe and front-end loader will increase your profits by at least the rate of return that you could have earned on your money in the bank. This is why we call the return to capital, interest....
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