Capital Market
For Monash University Students: If you have studied intermediate level microeconomics this will be easy reading. Please assist fellow students. Financial Markets bring together borrowers and lenders of funds. They bring aggregate saving into equality with aggregate investment. Consumers have different time preferences for their consumption. Producers use capital until its marginal revenue productivity equals its opportunity cost in interest charges. These are Paretian optimal solutions for welfare maximization. Enjoy. Dr. Scott The Capital Market
The previous chapter described how labor effort is not fixed in supply, but is a variable factor of production. By introducing the worker's preference function for leisure and income, the model of the market economy expands. In this chapter capital is no longer treated as fixed in supply but instead is shown to be a variable factor of production. To show this, time must be made an explicit variable. It allows consumers to choose how they will vary their consumption over time, that is, how they decide whether or not to save. Also, businessmen who create capital must devote current income to investment in plant and equipment and inventory. Thus, the savings behavior of consumers and the investment behavior of entrepreneurs leads to the introduction of variable amounts of capital into the model of the market economy. 9.1 VARIABLE AMOUNTS OF CAPITAL In the model so far all of each good that is produced is also sold each period. This market-clearing assumption gives two equations that show that none of the quantities of goods 1 and 2 remain unsold. If we admit that some amounts of goods 1 and 2 are not sold but rather added to the stock of inventories of goods on hand, then there exists some postponement of consumption and these added inventories represent one form of the existence of capital goods. One of the goods being produced may also be a capital good; that is, good 2 may be
The previous chapter described how labor effort is not fixed in supply, but is a variable factor of production. By introducing the worker's preference function for leisure and income, the model of the market economy expands. In this chapter capital is no longer treated as fixed in supply but instead is shown to be a variable factor of production. To show this, time must be made an explicit variable. It allows consumers to choose how they will vary their consumption over time, that is, how they decide whether or not to save. Also, businessmen who create capital must devote current income to investment in plant and equipment and inventory. Thus, the savings behavior of consumers and the investment behavior of entrepreneurs leads to the introduction of variable amounts of capital into the model of the market economy. 9.1 VARIABLE AMOUNTS OF CAPITAL In the model so far all of each good that is produced is also sold each period. This market-clearing assumption gives two equations that show that none of the quantities of goods 1 and 2 remain unsold. If we admit that some amounts of goods 1 and 2 are not sold but rather added to the stock of inventories of goods on hand, then there exists some postponement of consumption and these added inventories represent one form of the existence of capital goods. One of the goods being produced may also be a capital good; that is, good 2 may be