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Lecture 27 april 10 exam 3

Lecture 27 april 10 exam 3 - A nnouncement s H W for ch...

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Announcements HW for ch. 11-13 due Monday HW for ch 14 due next Thursday Aplia looks a bit confusing right now – make sure to note the differences between readings and graded assignments.
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2 of 32 THE CAPITAL MARKET capital market The market in which households supply their savings to firms that demand funds to buy capital goods. (Part of the “market for loanable funds)” The funds that firms use to buy capital goods come, directly or indirectly, from households. When a household decides not to consume a portion of its income, it saves. Investment by firms is the demand for capital . Saving by households is the supply of capital . Various financial institutions facilitate the transfer of households’ savings to firms that use them for capital investment.
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3 of 32 THE CAPITAL MARKET $1,000 in Savings Becomes $1,000 of I nvestment In general, projects are undertaken as long as the revenues likely to be realized from the investment are sufficient to cover the interest payments to the household.
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4 of 32 THE CAPITAL MARKET bond A contract between a borrower and a lender, in which the borrower agrees to pay the loan at some time in the future, along with interest payments along the way. financial capital market The part of the capital market in which savers and investors interact through intermediaries. interest rate A fee paid annually expressed as a percentage of the loan or deposit.
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5 of 32 THE CAPITAL MARKET capital income Income earned on savings that have been put to use through financial capital markets. interest The payments made for the use of money. CAPI TAL I NCOME: I NTEREST AND PROFI TS
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6 of 32 THE CAPITAL MARKET share of common stock A certificate that represents the ownership of a share of a business, almost always a corporation. Firms share profits with their investors dividend Profits that are paid directly to shareholders. profit The excess of revenues over cost in a given period.
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7 of 32 THE DEMAND FOR NEW CAPITAL AND THE INVESTMENT DECISION Firms have an incentive to expand in industries that earn positive profits—that is, a rate of return above normal—and in industries in which economies of scale lead to lower average costs at higher levels of output. Positive profits in an industry stimulate the entry of new firms. The expansion of existing firms and the creation of new firms both involve investment in new capital.
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THE FIRM’S INVESTMENT DECISION 8 of 32
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9 of 32 AND THE INVESTMENT DECISION (BASIC) For a firm, the first unit of capital may provide a big return but each additional until might provide less and less return ( holding all other inputs constant) – diminishing marginal product.
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