Note the definition of rent at the bottom of p. 821. In conjunction with this definition, we see that the supply of land is fixed, or perfectly inelastic. This is shown in the graph on the bottom of p. 821. A perfectly inelastic supply is depicted as a vertical supply curve. Although the supply is fixed, demand can change, as is shown in this graph. Since the supply of land is perfectly inelastic, the demand must be the determining factor in establishing the market price. Draw a vertical supply curve; then draw two or three demand curves, each one being in a higher position than the preceding demand curve. Equilibrium price rises each time.

As the author states, the concept of rent may be extended to other factors that receive payments above their opportunity cost. That is, what amount would a given resource receive in its next best usage? If the current factor payment is well above this, then rent (sometimes called quasi-rent) is being received. Suppose a college faculty member is currently earning $75,000 per year and that his next best employment opportunity would be running a roadside vegetable stand and earning $25,000 per year. This faculty member is receiving quasi-rent of $50,000 per year.

The discussion of profit as a return to entrepreneurship begins on p. 824. We notice that there are two types of profit: normal and economic. Normal profit is what an entrepreneur must have to stay in the business or, as an economist would put it, to keep resources currently utilized. Without normal profit, the entrepreneur would be better off closing the business and going to work for someone else. The exact amount of normal profit needed depends on the entrepreneur's opportunity wage: What would be the next best employment opportunity available to the entrepreneur?

The other type of profit, economic, is simply defined as any profit above and beyond a normal profit. This, of course, is what the entrepreneur is hoping for. Economic profit is the entrepreneur's reward for innovation, creativity, etc.

As you read about interest, the return to capital, be sure to study carefully the present value concept presented on pp. 826-828. By the way, you do not have to memorize the present value formula in the middle of page 828. You should, however, study and know how to use the present value table at the top of p. 827.

Present value may be thought of as compound interest in reverse. In fact, you can solve a compound interest problem using a present value table. All you have to do is take the decimal value provided in the present value table and divide instead of multiply. The opposite is also true. If you were given a compound interest table, you could locate the appropriate decimal value and then divide instead of multiply in order to solve a present value question.

To summarize, present value and compound interest are two sides of the same coin. They quantify the time value of money at a specific interest rate. Clearly, $100 in hand today is worth more than $100 you will receive five years from now, due to the compound interest effect. Similarly, if you needed $1,000 ten years from now then you wouldn't to save or invest that much today. You expect a lesser amount to grow to $1,000 over time, depending on the assumed interest rate.