McGraw-Hill OnlineMcGraw-Hill Higher EducationLearning Center
Student Centre | Instructor Centre | Information Centre | Home
Math Review
Chapter Outline
Chapter Summary
Quick Quiz
Key Terms & Glossary
Feedback
Help Center


Microeconomics and Behaviour
Microeconomics and Behaviour
Robert H. Frank, Cornell University
Ian C. Parker, University of Toronto
Capital

Chapter Outline

  1. This chapter is concerned with real capital, which is the productive machinery of an economy, rather than financial capital, which performs the function of money.
  2. As with labour, the demand for real capital will be the marginal revenue product or the value of the marginal product of the machine, depending upon the market structure of the output market.
  3. Maintenance, obsolescence costs, and interest payments make up the opportunity cost of capital, which the rental rate must cover. The present value of the income stream obtained through the use of capital must cover the rental cost the firm pays.
  4. Interest rates are determined by the supply and demand for loanable funds.
    1. Nominal interest rates cover the inflation loss to money over time.
    2. Real rates, which are i = (nominal rate - inflation rate) divided by (1 plus the inflation rate), represent the real cost of capital to the producer.
  5. The market for stocks and bonds raises funds for real capital by providing an interest or profit return just sufficient to cover the full opportunity costs of providing capital, including a risk premium.
    1. Markets are efficient, in that they quickly account for contingencies that arise that might create profit wedges in markets.
    2. Information bought from venders is almost certain to be too late to be useful in making economic profit.
    3. The taxation of returns on capital will significantly influence the return on capital.
  6. Economic rent is the return on a resource in excess of the opportunity cost of the resource (its return in its next best available use).
  7. The demand for capital will be reduced if firms adopt a peak-load pricing strategy that evens out production over time.
  8. The timing and extent of the harvest of renewable resources and the extraction of exhaustible resources depends on the relationship between the real rate of interest and the growth rate of the value of the resource.




McGraw-Hill/Irwin




Copyright2002 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Policy.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.