Transcript PowerPoints Chapter 13

Chapter 13
Chapter 13
CAPITAL AND EXHAUSTIBLE
RESOURCES
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
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Financial Capital And Real Capital
The Demand For Real Capital
The Relationship Between The Rental Rate And The Interest Rate
The Criterion For Buying A Capital Good
Interest Rate Determination
Real Versus Nominal Interest Rates
The Market For Stocks And Bonds
The Anomaly Of The Investment Newsletter
Tax Policy And The Capital Market
Economic Rent
Peak-load Pricing
Exhaustible Resources As Inputs In Production
15-3
Financial Capital And Real Capital
• Financial capital: money or some other paper
asset that functions like money.
• Real capital: productive equipment that
generates a flow of services; also called
physical capital.
15-4
The Demand For Real Capital
• If the firm can acquire the services of as much
capital as it wishes at a constant rental rate of
r/yr, it should employ capital up to the point
at which its marginal revenue product (MRPK)
is exactly equal to the rental rate.
15-5
The Rental
Rate And The Interest Rate
• 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.
15-6
The Criterion For Buying A Capital
Good
• A machine will bolster the firm’s rate of
production not only in the current period, but
also in the future.
• The firm should buy the machine if and only if
PV is greater than or equal to PK.
– Since PV is inversely related to the market rate of
interest the firm that owns its capital will want to
employ more of it the lower the market rate of
interest is.
15-7
Interest Rate Determination
• A firm’s demand for capital equipment
depends on the rate of interest, the purchase
price of capital, and the rates of technological
and physical depreciation.
– Interest rates are determined by the intersection
of the supply and demand curves for loanable
funds.
15-8
Figure 13.1: Equilibrium in the Market
for Loanable Funds
0
(R/yr)
15-9
Real Versus Nominal Interest Rates
• When banks expect the overall level of prices to rise, they
will charge an interest premium to counteract the erosion of
the real purchasing power of future loan payments.
– The actual number that appears on the bank loan contract is called
the nominal rate of interest.
– The real rate of interest is given by:
i = (n –q) / (1 + q)
• n - nominal annual rate of interest (expressed as a fraction)
• q - annual rate of inflation
15-10
The Market For Stocks And Bonds
• A bond is essentially a promissory note issued
by the firm.
– The face value of the bond is the amount for
which it was sold to the investor who bought it
from the firm.
– Short-term bonds: often promise to return their
face value in full within 90 days.
– Long-term bonds: can reach maturity only after 30
years, and some have even longer lifetimes.
15-11
The Market For Stocks And Bonds
• Perpetual bond: a bond that pays a fixed
payment each year in perpetuity; also called a
annuity.
• Risk premium: a payment differential
necessary to compensate the supplier of a
good or service for having to bear risk.
15-12
Figure 13.2: The Trade-Off between Safety
and Expected Return
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15-13
The Efficient Markets Hypothesis
• Efficient stock market: the price of a stock
embodies all available information that is
relevant to its current and future earnings
prospects.
15-14
Tax Policy And The Capital Market
• Sometimes the interest earned on certain
bonds is exempted from income tax.
• Which kind of bond you should buy depends
on the marginal rate at which your income is
taxed.
15-15
Economic Rent
• 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.
15-16
Figure 13.3: Economic Rent
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0
15-17
Peak-load Pricing
• Peak-load pricing: the practice whereby
higher prices are charged for goods or services
during the periods in which they are
consumed most intensively.
15-18
Figure 13.4: The Effect of
Peak-Load Pricing
Peak cost = 36
Average cost = 25
Off-peak cost = 15
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15-19
Exhaustible Resources As Inputs
In Production
• An exhaustible resource is one that cannot be
replenished by people.
• How does a competitive market allocate exhaustible
resources?
• The owner of an exhaustible resource has two
options:
– (1) he can hold the resource for the time being.
• Opportunity cost is the interest that could have been earned had
the resource been sold and the proceeds deposited in a bank (or
used to purchase a stock or bond).
– (2) he can sell it.
15-20
Figure 13.5: The Equilibrium
Price Path for an Exhaustible Resource
15-21
Exhaustible Resources As Inputs
In Production
• Because the demand curves for exhaustible
resources are downward sloping the gradual
rise in price will cause a gradual reduction in
the quantity of the resource demanded.
• Rising prices also stimulate the production of
substitutes for the exhaustible resource.
15-22
Figure 13.6: The Growth Curve
for a Tree
Volume of timber
(board m)
15-23
Figure 13.7: The Optimal Time
of Harvest
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15-24
Figure 13.8: The Effect
of Rising Prices on the Use of an Exhaustible Resource
15-25
Figure 13.9: The Stock Exhaustion Path
15-26
Figure 13.10: Adjustment When Investors Expect to be
Stuck with Excess Oil
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15-27
Figure 13.11: Adjustment When Investors Expect Oil to
Run Out Too Soon
0
15-28
Figure 13.12: Response to a Fall
in the Price of Solar Energy
15-29