economic rent

Examples of economic rent in the following topics:

• Measuring and Protecting against Economic Exposure

  • Analysts have difficulties measuring economic exposure.
  • An analyst measures the economic exposure by estimating a regression equation, shown in Equation 24.
  • A positive ($\beta$) indicates your cash rent varies with the exchange rate fluctuations, and you have a potential economic exposure.
  • Consequently, you cannot use a forward contract in this case because you do not have economic exposure.
  • Thus, international firms can use five techniques to reduce its economic exposure.

• Difference Between Economic and Accounting Profit

  • However, if the firm could have made $50,000 by renting its land and capital, its economic profit would be a loss of $10,000 ($100,000 in revenue - $60,000 in explicit costs - $50,000 in opportunity costs).
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Wages paid to workers, rent paid to a landowner, and material costs paid to a supplier are all examples of explicit costs.
  • These consist of the explicit costs a firm has to maintain production (for example, wages, rent, and material costs).
  • The biggest difference between economic and accounting profit is that economic profit takes implicit, or opportunity, costs into consideration.

• Urban Gentrification

  • The remaining two families rented and were expecting to be economically evicted.
  • The average rent increased 488%, from $85 to $500 per month.
  • Gentrification occurs when wealthier people buy or rent property in low-income or working class neighborhoods, driving up property values and rent.
  • They are often socially and professionally dominant while economically marginalized.
  • Political economic explanations argue new economic or policy incentives contribute to gentrification.

• Price Ceilings

  • An example of a price ceiling is rent control.
  • These regulations require a more gradual increase in rent prices than what the market may demand.
  • Without rent control, there could be situations where the demand for housing in an area could cause rent prices to make a substantial jump.
  • Unable to afford the new, significantly higher rent, a majority of the neighborhood's tenants may be forced to move out of the neighborhood.
  • Rent controls limit the possibility of tenant displacement by minimizing the amount by which rent can be increased.

• Overview of Lease Accounting

  • Under an operating lease, the lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable.
  • Under a capital lease, the lessee does not record rent as an expense.
  • If the lease has an ownership transfer or bargain purchase option, the depreciable life is the asset's economic life; otherwise, the depreciable life is the lease term.
  • Under an operating lease, the lessor records rent revenue (credit) and a corresponding debit to either cash/rent receivable.
  • The rents are an asset, which is broken out between current and long-term, the latter being the present value of rents due more than 12 months in the future.

• Impact of Leasing on the Income Statement

  • The life of the lease is equal to or greater than 75% of the economic life of the asset
  • The lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable when on an operating lease.
  • With a capital lease, the lessee does not record rent as an expense.
  • Over time, the depreciation and interest will equate to the value of the underlying rent payments.
  • Rent revenue is credited with a corresponding debit to cash/cash receivables.

• Capital and Technology

  • Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.

• Types of Costs

  • In economics, the total cost (TC) is the total economic cost of production.
  • An example of a fixed cost would be the cost of renting a warehouse for a specific lease period.
  • The economic cost of a decision that a firm makes depends on the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen.
  • Economic cost is the sum of all the variable and fixed costs (also called accounting cost) plus opportunity costs.

• Individuals Face Opportunity Costs

  • Individuals face opportunity costs in both economic and non-economic decisions.
  • As economic actors, individuals face opportunity costs as well.
  • You could have chosen to spend your money on books or rent or a spring break trip; whichever one of those options is most valuable to you (beside purchasing a new computer) is the opportunity cost.
  • Such logic applies for every economic decision: purchasing one good means that an individual has chosen to spend resources one way instead of another.
  • Opportunity costs are an important consideration for economists and business people, but are faced by individuals even when they are not making classically economic decisions.

• Break-Even Analysis

  • In economics and business, the break-even point (BEP) is when costs (or expenses) and revenues are equal: there is no net loss or gain and the business has "broken even" by earning back its costs.
  • Break-even analysis determines the minimum quantity a company needs to sell in order to cover its minimum costs, including rent, building expenses, utilities, and the operational costs of running day-to-day operations.
  • If they estimate they cannot sell that many, they can reduce their fixed costs (renegotiating rent, keeping phone bills or other expenses down), reduce variable costs (paying less for materials per item produced, usually by finding a new supplier), or raise the price of their tables.
  • Over a longer period of time, other factors can come into play, like changes in rent or quantity sold, or other competitors entering the market.