Chapter 16 Flashcards
(29 cards)
Def of real capital
Productive equipment that generates a flow of services; also called physical capital
Def of financial capital
Money or some other paper asset that functions like money
present value
denoted PV(X)
the present value of a payment of X euros T years from now is
X / ((1 + r)^T),
where r is the annual rate of interest.
It is conventional to refer to the horizontal intercept of the intertemporal budget constraint as the
present value of lifetime income
The actual number that appears o the bank loan contract is called the NOMINAL RATE OF INTEREST
If n denotes the nominal annual rate of interest and q denotes the annual rate of inflation (both expressed as a fraction) then the
REAL RATE OF INTEREST IS GIVEN BY
i = (n-q) / (1+q)
marginal rate of time preference (MRTP)
AKA the slope of the
intertemporal indifference map
the number of units of consumption in the future a consumer would exchange for 1 unit of consumption in the present.
permanent income
the present value of lifetime income.
The theory of the individdual fir,m’s demand for labour apploes without moderation for other
inputs
In the SR if the firm can acquire the services of as much capital as it wished at a constant rental rate r/yr it should employ capital up to
MRPK = MR x MPK = r
If the firm happens to be a perfect competitor in its product market so that its MR = P then
VMPK = P x MPK = r
one difference between capital and labour is that whereas workers tend to specialise in particular types of activity…
…new sources of capital (financial capital) are almost completely fungible
technological obsolescence
the process by which a good loses value not because of physical depreciation, but because improvements in technology make substitute products more attractive.
annual rental rate of capital ,r, is…
r = i + m + subDelta
i denotes the market rate of interest
m denotes annual maintenance expenses
subDelta denotes physical and technological depreciation
PV = (R-M) / ((1+i)) + (R-M) / ((1+i)^2) + …(R-M) / ((1+i)^N) + S/ ((1+i)^N)
R is total revenue over next N years
M us the cost to maintain at the end of N years
it has scrap value of S euros
Interest rates are determined by…
…the intersection of the SUPPLY AND DEMAND curves for LOANABLE FUNDS
a firms demand for capital equipment depends on the :
Rate of interest
_the purchese price of capital
__the rates of technological and physical
depreciation
perpetual bond or consol
a bond that pays a fixed payment each year in perpetuity; also called a consol.
P_C = I / i
I denotes the consul’s annual payment
_i denotes the market
rate of interest
___P_C denotes the price of
the consul
risk premium
a payment differential necessary to compensate the supplier of a good or service for having to bear risk.
economic rent
the difference between what a factor of production is paid and the minimum amount necessary to induce it to remain in its current use.
when an input is supplied perfectly inelastic (Verticle)…
The entire payment it receives is economic rent
Economic rent is the factor market analogue of producer surplus in the goods market
Peak load pricing is a strategy…
where the price of a good or service is higher during periods of high demand (peak hours) and lower during periods of low demand (off-peak hours).
