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| | Look again at its cost. What is your best decision? Don’t buy it. | | Look again at its cost. What is your best decision? Don’t buy it. |
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| − | ==Economic Rent==
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| − | There are four equivalent definitions of “economic rent.” Pick the one you like the best and then use it to understand the others:
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| − | (1) Economic rent is the increased payment for a (scarce) good due to its very limited supply.
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| − | (2) Economic rent is the amount that a payment exceeds the supply cost. The “rent” is the excess of a good’s actual price above the good’s supply cost.
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| − | (3) Economic rent is the increased payment for an input that is in perfectly inelastic supply.
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| − | (4) Economic rent is the payment of a factor of production in excess of the factor’s opportunity cost or supply cost.
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| − | This is one of the most complex concepts of the course. But this should help: '''''economic rent is the amount that a monopoly can charge in excess of the good’s cost'''''. Economic rent is the surplus enjoyed by the seller, at the expense of the person paying it.
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| − | Suppose there is only one house on a peninsula overlooking the ocean out of both sides of the house. The economic rent is the excess in price that the owner can charge due its unique location. The supply is one, and anyone determined to have that house must pay whatever price is charged. Of course, the Law of Demand places a limit on the rent, because people can’t pay what they don’t have, nor will they pay more than what they value something at. But the overcharge due to the uniqueness of the good is what constitutes the “economic rent.”
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| − | ==Economic Profits==
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| − | Remember that “economic profits” include far more than ordinary “accounting profits” or “profits” in the ordinary sense of the term. “Economic profits” are total revenues minus costs that include opportunity costs, time value of money, and other hidden costs missing from most statements about profits. Economic profits are much harder to come by.
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| − | Who enjoys true economic profits? Monopolies do, because they can increase their price and reap economic rents. Microsoft garners hefty profits year after year, with no end in sight. But ultimately all monopolies, even Microsoft, fall prey to competition and those economic profits dry up.
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| − | Inventors and other innovators can enjoy real economic profits. Thomas Edison did, with his numerous marvelous patented inventions. Patents give the holder an exclusive right to the product for 17 years. Competition is prevented for that time, and enormous economic profits can be obtained without competition driving the price down. AT&T used Alexander Graham Bell’s patent on the telephone to build a highly profitable company for a century. But ultimately its economic profits dried up, too.
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| − | ===Honors: Is "economic rent" the same as "deadweight loss"?===
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| − | Is "economic rent" (the extra amount charged by a company above its costs, perhaps because it is a monopoly) the same as the "deadweight loss" to society? The answer is "yes": "economic rent" is a type of deadweight loss. Any time the price of a good is raised above its price in a perfectly competitive market, there will be buyers who will not pay the higher price and thus will lose out on the consumer surplus between the higher price and lower, competitive price. That loss in consumer surplus is a deadweight loss.
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| − | When the price is increased due to taxes, then both the buyers and the sellers lose out, and there is a deadweight loss that is even greater because it includes both a consumer surplus lost by the buyer and a producer surplus lost by the seller. So while higher prices due to monopolies are bad, higher prices due to taxes are even worse. You could review Lecture 7 and its graph to understand this further.
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| − | To show you how recent the theories of economics are, the term "rent seeking" behavior was introduced only 40 years ago. It describes actions by firms to increase their prices and obtain economic rent above the free market, competitive price. Such behavior is not good for the public, because it causes a deadweight loss (lost consumer surplus).
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| | ==Assignment== | | ==Assignment== |