Chapter 16

Interest is a payment for the immediate use of a sum

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Unformatted text preview: Interest is a payment for the immediate use of a sum of money. But since money is not itself productive, the payment is made in effect for the capital (or means of production) which can be acquired with it. Economic or pure profit is the excess of revenues over all explicit and implicit cost (including normal profit, that is the opportunity of the owner of the business to derive income from some other activity). Economic profit is the difference between total revenue and total cost, as learned in previous chapters. There are three theories to where profit came from: uncertainty, arbitrage opportunities, and innovation. In chapter 16, they discuss interest rates, rent, and profit. Rent is a concept of economic surplus that is shown to have lead some to recommend a single tax on rent. Interest is used in two different ways in economics. The first way is interest can be referred as the price for credit or loanable funds. The second way is that interest can also mean capital that is earned as an input in the production process. Profits are shown to play an important role in permitting economic change. Economic rent is a payment that is just for land. Interest is a payment for the immediate use of money that has been borrowed. And since money is not productive itself, the payment for the capital is the productivity. The supply of loanable funds will be higher if the interest rate increases. It the interest rates decreases, the quantity supplied of loanable funds will decrease as well. Interest rates differ...
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