Summary
Summary Chapter 15 EC120 Notes
- Course
- Institution
This is notes on Economics Chapter 15
[Show more]
Seller
Follow
tharunsakthi
Content preview
CHAPTER 15: INTEREST RATES AND THE CAPITAL MARKETA BRIEF OVERVIEW OF THE CAPITAL MARKET:
- Firms require physical capital to produce
- Purchases of new capital equipment are investments
- Also require working capital, which are funds used to acquire physical capital
(materials, labour, etc)
- Firms finance their activities in one of four ways:
a. Retained Earnings
b. Borrow from banks and other financial intermediaries
c. Issuing bonds and thereby borrow directly from lenders
d. Sell stocks for additional capital
- Household saving determines total supply of financial capital
- The illustration below showcases the interaction of firms and households:
- When economists speak of the demand and supply for labour, they are referring
to the flow of labour services
- Example → firm hires the services of a worker for a week, after which the
firm and worker go separate ways
- When a firm considers its demand for physical capital, it is considering
purchasing a new piece of equipment and thereby adding to its stock of capital.
This piece of equipment will have many useful lives
, PRESENT VALUE:
- Present Value → the most that someone would be prepared to pay to get a
specific amount in the future
PRESENT VALUE FORMULA:
- PV = FV/(1 + r)^n
THE PRESENT VALUE OF A STREAM OF FUTURE SUMS:
- To consider the present value of payments that continues for many periods, you
must take into account each period individually
- Example → One new lathe may generate a marginal revenue product equal
to $200 one year from now, $180 two years from now, and $210 three
years from now before it wears out and caesar to generate any further
benefits
- Solution:
THE DEMAND FOR CAPITAL:
- A firm’s demand for financial capital comes from its demand for physical capital
- Economists assume that the amount of physical capital the firm chooses to use
comes from its objective of maximizing profit
THE FIRM’S DEMAND FOR CAPITAL:
- An individual firm faces a given interest rate and a given purchase price of capital
goods
- The firm can vary the quantity of capital that it employs and, as a result, the
marginal revenue product of its capital aries
THE DECISION TO PURCHASE A UNIT OF CAPITAL:
- If the PV is greater than or equal to the purchase price, the firm should buy the
capital good; if the PV is less than the purchase price, the firm should not buy it
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller tharunsakthi. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.20. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62555 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now