Lecture 27 april 10 exam 3

Lecture 27 april 10 exam 3 - Announcements HW for ch. 11-13...

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Unformatted text preview: 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. 2 of 32 TH E CAPI TAL M ARKET capital mar ket 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. 3 of 32 TH E CAPI TAL M ARKET $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. 4 of 32 TH E CAPI TAL M ARKET 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 mar ket The part of the capital market in which savers and investors interact through intermediaries. inter est r ate A fee paid annually expressed as a percentage of the loan or deposit. 5 of 32 TH E CAPI TAL M ARKET capital income I ncome earned on savings that have been put to use through financial capital markets. inter est The payments made for the use of money. CAPI TAL I NCOM E: I NTEREST AND PROFI TS 6 of 32 TH E CAPI TAL M ARKET shar e of common stock A certificate that represents the ownership of a share of a business, almost always a corporation. Fir ms shar e pr ofits with their investor s dividend Profits that are paid directly to shareholders. pr ofit The excess of revenues over cost in a given period. 7 of 32 TH E DEM AND FOR NEW CAPI TAL AND TH E I NVESTM ENT DECI SI ON Firms have an incentive to expand in industries that earn positive profitsthat is, a rate of return above normaland 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. THE FI RMS I NVESTMENT DECI SI ON 8 of 32 9 of 32 AND TH E I NVESTM ENT DECI SI ON (BASI C) 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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This note was uploaded on 08/15/2011 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture 27 april 10 exam 3 - Announcements HW for ch. 11-13...

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