Chapter 13

RENT,
INTEREST,
AND PROFIT
CHAPTER 13
ECONOMIC RENT
In Layman's term, rent means the amount of money paid for the use of an
apartment or room. For a business entity rent is the amount of money paid for the use
of machineries or factory building.
In economics, economists use the term rent in a narrower sense. Economic rent is
the amount of money paid for the use of land and other natural resources which are
totally fixed, which makes it different from wages, interests, and profits. Land rent is a
surplus payment since this would be available to society even if this rent was not paid.
Economic rent is the price paid for the use of land and other natural resources which
are completely fixed.
PRODUCTIVITY DIFFERENCE
AND RENT DIFFERENCE
For theoretical purposes, we are assuming that all lands are of
the same grade, but this assumption is unrealistic. Pieces of land
differ in its degree of productivity, depending on the climatic
factors and temperature, as well as the fertility of soil.
Productivity can be reflected in demand and price.
Assuming other things equal, considering a land's location,

renters will choose a land which is located near customers, their
supplies, and labor than those land located in remote places.
Example would be the enormously high price of land which are
located near malls, hospitals, and highways.
INTEREST
Interest is the price paid for the use of money. It is the amount that
debtors pay to their creditors for transferring the purchasing power
from the present to the future.
Interest is stated in percentage Interest is paid with money for the

loan of money. Because of this, interest is stated in percentage of the
amount of money borrowed by the debtor instead of a fixed peso
amount, for example. 12% interest annually, or an amount of Php120
annually for borrowed money of Php1000.
Money is not an economic resource. Coins, paper currency, bank accounts,
cannot produce goods or services if they are in those stated forms. But money
can be used by businesses to acquire capital which will be use for production.
There are different types of interest rates including mortgage rates and
commercial rates. Interest rates may vary for some reasons, it can due to risks
that a loan entails, the maturity length of the loan, and of course due size of
the loan.
In addition, interest rates also affect the level of investment 8also there is a
change in interest rate, the demand for a certain investments also changes. It
can also affect the composition of production of a firm. Interest rates allocate
the amount of money to production which are expected to generate the
highest level of profit.
REAL INTEREST
The amount paid for the creditor's non-use of a certain amount of

money, including the loss in its purchasing power. Interest that is
adjusted for inflation is called real interest. Real interest is the basis
for individuals and entities investment decisions instead of the
nominal rate.
PURE RATE OF INTEREST
All risks are taken out of the so called pure rate of interest.
ECONOMIC PROFIT
For accountants, profit only considers explicit costs. For economists, it is

different, it both considers explicit and implicit costs. Implicit costs are amount
of monetary income that a firm Sacrifices for using its own resources, rather
than supplying those resources to the market. Economic Profit is what remains
from the firm's total revenue after deducting all cost including implicit costs. It
cain either be positive or can be a loss.
Economic Profit remaining amount of the firm's total revenue after

subtracting all costs.
FUNCTION OF PROFIT
The main driver in a capitalistic economy is the economic profit. It affects

the allocation of resources among alternative uses and the level of economic
output.
PROFIT AND TOTAL
OUTPUT
A firm’s main reason for innovation or improvement is the desire and

expectation of economic profit. It in on of economic profit. This stimulates
new investments, therefore, asses the total number of output and
employment as well. Thus, this drive for economic profit further enhance
economic growth by pursuing innovation.
PROFIT AND RESOURCE
ALLOCATION
Allocation of resources can further be improved among alternative lines of

production, distribution, and sales by profit. Entrepreneurs aim for profit and
want to remove losses. The existence of continuing profit is evidence that a
society desires the firm or industry to expand. It attracts resources from firms
and industries that are not profitable. In contrast, continuing losses penalize
firms that fail to adjust their productive efforts to match the consumer
preferences. Those losses signal society's desire for afflicted entities to
contract.
JORDAN MAGO CUTE
JORDAN MAGO CUTE
THANK YOU
JORDAN MAGO CUTE
JORDAN MAGO CUTE

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RENT,

Assuming other things equal, considering a land's location,

Interest is stated in percentage Interest is paid with money for the

The amount paid for the creditor's non-use of a certain amount of

PURE RATE OF INTEREST

For accountants, profit only considers explicit costs. For economists, it is

Economic Profit remaining amount of the firm's total revenue after

The main driver in a capitalistic economy is the economic profit. It affects

A firm’s main reason for innovation or improvement is the desire and

Allocation of resources can further be improved among alternative lines of

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