Week 15 Notes

·         Interest is a price that comes from the supply and demand process of loanable funds

·         Interest emerges from the desire to obtain more purchasing power than we have had previously

·         Interest – the price of obtaining unearned resources

·         Profit = total revenues – total costs

o   Example: Hypothetical Pizza shop

§  Total Cost: 23,000 (from savings account) + 20,000 (loan at 10% interest) = 45000

§  Annual Revenues: 85,000

o   Accounting profit:  40,000 = 85000 – 45000

§  40000 - 30,000 (What she could have been making in her other job) - 6000 (what she could have been making if renting out the space the shop will be in) – 2,300 (what should could have made if she had invested the 23,000 she used from her savings account in a fund receiving 10% interest)

o   Economic profit: 40,000 – 38,300 = 1700

·         Profits only exist in a world of uncertainty

·         Competitive advancements lowers revenues and lowers the cost of making pizza

o   Inefficient producers are forced out of the market

o   When will these prices change a lot?  When won’t they?