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1 | PowerPoint Lectures for Principles of | 28 | immediately sold the mortgages to a |
Microeconomics, 9e By Karl E. Case, Ray C. | secondary market. 28 of 48. | ||
Fair & Sharon M. Oster. ; ; 1 of 48. | 29 | The Capital Market. Capital | |
2 | 2 of 48. | Accumulation and Allocation. In modern | |
3 | Input Demand: The Capital Market and | industrial societies, investment decisions | |
the Investment Decision. Prepared by: | (capital production decisions) are made | ||
Fernando & Yvonn Quijano. | primarily by firms. Households decide how | ||
4 | 11. Input Demand: The Capital Market | much to save; and in the long run, savings | |
and the Investment Decision. CHAPTER | limit or constrain the amount of | ||
OUTLINE. Capital, Investment, and | investment that firms can undertake. The | ||
Depreciation Capital Investment and | capital market exists to direct savings | ||
Depreciation The Capital Market Capital | into profitable investment projects. 29 of | ||
Income: Interest and Profits Financial | 48. | ||
Markets in Action Mortgages and the | 30 | The Demand for New Capital and the | |
Mortgage Market Capital Accumulation and | Investment Decision. Firms have an | ||
Allocation The Demand for New Capital and | incentive to expand in industries that | ||
the Investment Decision Forming | earn positive profits—that is, a rate of | ||
Expectations Comparing Costs and Expected | return above normal—and in industries in | ||
Return A Final Word on Capital Appendix: | which economies of scale lead to lower | ||
Calculating Present Value. 4 of 48. | average costs at higher levels of output. | ||
5 | Capital, Investment, and Depreciation. | Positive profits in an industry stimulate | |
Capital. capital Those goods produced by | the entry of new firms. The expansion of | ||
the economic system that are used as | existing firms and the creation of new | ||
inputs to produce other goods and services | firms both involve investment in new | ||
in the future. Tangible Capital. physical, | capital. 30 of 48. | ||
or tangible, capital Material things used | 31 | The Demand for New Capital and the | |
as inputs in the production of future | Investment Decision. Forming Expectations. | ||
goods and services. The major categories | The Expected Benefits of Investments. The | ||
of physical capital are nonresidential | investment process requires that the | ||
structures, durable equipment, residential | potential investor evaluate the expected | ||
structures, and inventories. 5 of 48. | flow of future productive services that an | ||
6 | Capital, Investment, and Depreciation. | investment project will yield. The | |
Capital. Social Capital: Infrastructure. | Expected Costs of Investments. The ability | ||
social capital, or infrastructure Capital | to lend at the market rate of interest | ||
that provides services to the public. Most | means that there is an opportunity cost | ||
social capital takes the form of public | associated with every investment project. | ||
works (roads and bridges) and public | The evaluation process thus involves not | ||
services (police and fire protection). 6 | only estimating future benefits but also | ||
of 48. | comparing them with the possible | ||
7 | Capital, Investment, and Depreciation. | alternative uses of the funds required to | |
Capital. Intangible Capital. intangible | undertake the project. At a minimum, those | ||
capital Nonmaterial things that contribute | funds could earn interest in financial | ||
to the output of future goods and | markets. 31 of 48. | ||
services. human capital A form of | 32 | Which investment projects are more | |
intangible capital that includes the | likely to be funded? a. Only those | ||
skills and other knowledge that workers | investment projects that are expected to | ||
have or acquire through education and | yield a rate of return higher than the | ||
training and that yields valuable services | market interest rate. b. Only those | ||
to a firm over time. 7 of 48. | investment projects that are expected to | ||
8 | Capital, Investment, and Depreciation. | yield a rate of return lower than the | |
Capital. The Time Dimension. The value of | market interest rate. c. As long as market | ||
capital is only as great as the value of | interest rates are rising, any investment | ||
the services it will render over time. | project will be funded, regardless of the | ||
Measuring Capital. capital stock For a | market interest rate. d. Only those | ||
single firm, the current market value of | investment projects that are expected to | ||
the firm’s plant, equipment, inventories, | yield a rate of return exactly equal to | ||
and intangible assets. 8 of 48. | the market interest rate. 32 of 48. | ||
9 | Which of the following is the best | 33 | Which investment projects are more |
measure of the capital stock of a business | likely to be funded? a. Only those | ||
firm? a. Book value, or the value of the | investment projects that are expected to | ||
company on its books. b. Historic value, | yield a rate of return higher than the | ||
or the trend in value added to a company | market interest rate. b. Only those | ||
over its history. c. Current market value, | investment projects that are expected to | ||
or the value of company’s capital stock in | yield a rate of return lower than the | ||
the market today. d. All of the above are | market interest rate. c. As long as market | ||
equally accurate measures of the capital | interest rates are rising, any investment | ||
stock of a business firm. 9 of 48. | project will be funded, regardless of the | ||
10 | Which of the following is the best | market interest rate. d. Only those | |
measure of the capital stock of a business | investment projects that are expected to | ||
firm? a. Book value, or the value of the | yield a rate of return exactly equal to | ||
company on its books. b. Historic value, | the market interest rate. 33 of 48. | ||
or the trend in value added to a company | 34 | What makes venture capital Green? The | |
over its history. c. Current market value, | Demand for New Capital and the Investment | ||
or the value of company’s capital stock in | Decision. Forming Expectations. Venture | ||
the market today. d. All of the above are | Capital Goes Big for Green The Kiplinger | ||
equally accurate measures of the capital | Letter. 34 of 48. | ||
stock of a business firm. 10 of 48. | 35 | The Demand for New Capital and the | |
11 | Capital, Investment, and Depreciation. | Investment Decision. Comparing Costs and | |
Investment and Depreciation. investment | Expected Return. expected rate of return | ||
New capital additions to a firm’s capital | The annual rate of return that a firm | ||
stock. Although capital is measured at a | expects to obtain through a capital | ||
given point in time (a stock), investment | investment. The expected rate of return on | ||
is measured over a period of time (a | an investment project depends on the price | ||
flow). The flow of investment increases | of the investment, the expected length of | ||
the capital stock. depreciation The | time the project provides additional cost | ||
decline in an asset’s economic value over | savings or revenue, and the expected | ||
time. 11 of 48. | amount of revenue attributable each year | ||
12 | Capital, Investment, and Depreciation. | to the project. 35 of 48. | |
Investment and Depreciation. TABLE 11.1 | 36 | The Demand for New Capital and the | |
Private Investment in the U.S. Economy, | Investment Decision. Comparing Costs and | ||
2007. TABLE 11.1 Private Investment in the | Expected Return. TABLE 11.2 Potential | ||
U.S. Economy, 2007. TABLE 11.1 Private | Investment Projects and Expected Rates of | ||
Investment in the U.S. Economy, 2007. | Return for a Hypothetical Firm, Based on | ||
TABLE 11.1 Private Investment in the U.S. | Forecasts of Future Profits Attributable | ||
Economy, 2007. TABLE 11.1 Private | to the Investment. TABLE 11.2 Potential | ||
Investment in the U.S. Economy, 2007. | Investment Projects and Expected Rates of | ||
TABLE 11.1 Private Investment in the U.S. | Return for a Hypothetical Firm, Based on | ||
Economy, 2007. TABLE 11.1 Private | Forecasts of Future Profits Attributable | ||
Investment in the U.S. Economy, 2007. | to the Investment. TABLE 11.2 Potential | ||
TABLE 11.1 Private Investment in the U.S. | Investment Projects and Expected Rates of | ||
Economy, 2007. TABLE 11.1 Private | Return for a Hypothetical Firm, Based on | ||
Investment in the U.S. Economy, 2007. | Forecasts of Future Profits Attributable | ||
TABLE 11.1 Private Investment in the U.S. | to the Investment. TABLE 11.2 Potential | ||
Economy, 2007. TABLE 11.1 Private | Investment Projects and Expected Rates of | ||
Investment in the U.S. Economy, 2007. | Return for a Hypothetical Firm, Based on | ||
TABLE 11.1 Private Investment in the U.S. | Forecasts of Future Profits Attributable | ||
Economy, 2007. TABLE 11.1 Private | to the Investment. Project. (1) Total | ||
Investment in the U.S. Economy, 2007. | Investment (Dollars). (2) Expected Rate Of | ||
TABLE 11.1 Private Investment in the U.S. | Return (Percent). (2) Expected Rate Of | ||
Economy, 2007. TABLE 11.1 Private | Return (Percent). A. New computer network. | ||
Investment in the U.S. Economy, 2007. | 400,000. 25. B. New branch plant. | ||
TABLE 11.1 Private Investment in the U.S. | 2,600,000. 20. C. Sales office in another | ||
Economy, 2007. GDP = 13,769 Gross private | state. 1,500,000. 15. D. New automated | ||
domestic investment = 2,139.0. GDP = | billing system. 100,000. 12. E. Ten new | ||
13,769 Gross private domestic investment = | delivery trucks. 400,000. 10. F. | ||
2,139.0. GDP = 13,769 Gross private | Advertising campaign. 1,000,000. 7. G. | ||
domestic investment = 2,139.0. GDP = | Employee cafeteria. 100,000. 5. 36 of 48. | ||
13,769 Gross private domestic investment = | 37 | The Demand for New Capital and the | |
2,139.0. GDP = 13,769 Gross private | Investment Decision. Comparing Costs and | ||
domestic investment = 2,139.0. GDP = | Expected Return. The demand for new | ||
13,769 Gross private domestic investment = | capital depends on the interest rate. When | ||
2,139.0. GDP = 13,769 Gross private | the interest rate is low, firms are more | ||
domestic investment = 2,139.0. Billions of | likely to invest in new plant and | ||
Current Dollars. Billions of Current | equipment than when the interest rate is | ||
Dollars. Billions of Current Dollars. | high. This is so because the interest rate | ||
Billions of Current Dollars. Billions of | determines the direct cost (interest on a | ||
Current Dollars. As a Percentage of Total | loan) or the opportunity cost (alternative | ||
Gross Investment. As a Percentage of Total | investment) of each project. ? FIGURE 11.3 | ||
Gross Investment. As a Percentage of Total | Total Investment as a Function of the | ||
Gross Investment. As a Percentage of Total | Market Interest Rate. 37 of 48. | ||
Gross Investment. As a Percentage of GDP. | 38 | The Demand for New Capital and the | |
As a Percentage of GDP. As a Percentage of | Investment Decision. Comparing Costs and | ||
GDP. As a Percentage of GDP. As a | Expected Return. Lower interest rates are | ||
Percentage of GDP. Nonresidential | likely to stimulate investment in the | ||
structures. 464.5. 21.7. 3.4. 3.4. | economy as a whole, whereas higher | ||
Equipment and software. 1004.5. 47.0. 7.3. | interest rates are likely to slow | ||
7.3. Change in private inventories. 5.1. | investment. ? FIGURE 11.4 Investment | ||
0.2. 0. 0. Residential structures. 664.8. | Demand. 38 of 48. | ||
31.1. 4.8. 4.8. Total gross private | 39 | The Demand for New Capital and the | |
investment. 2139.0. 100.0. 15.5. 15.5. - | Investment Decision. Comparing Costs and | ||
depreciation. - 1683.4. - 78.7. - 12.2. - | Expected Return. The Expected Rate of | ||
12.2. Net investment = gross investment - | Return and the Marginal Revenue Product of | ||
depreciation. 455.6. 21.3. 3.3. 3.3. 12 of | Capital. A perfectly competitive | ||
48. | profit-maximizing firm will keep investing | ||
13 | Which of the following statements is | in new capital up to the point at which | |
correct? a. Net investment equals gross | the expected rate of return is equal to | ||
investment plus depreciation. b. Gross | the interest rate. This is analogous to | ||
investment minus depreciation equals net | saying that the firm will continue | ||
investment. c. Capital stock at the end of | investing up to the point at which the | ||
last year plus gross investment this year | marginal revenue product of capital is | ||
equals capital stock at the end of this | equal to the price of capital, or MRPK = | ||
year. d. Net investment equals | PK, which is what we learned in Chapter | ||
depreciation. 13 of 48. | 10. 39 of 48. | ||
14 | Which of the following statements is | 40 | A Final Word on Capital. The concept |
correct? a. Net investment equals gross | of capital is one of the central ideas in | ||
investment plus depreciation. b. Gross | economics. Capital is produced by the | ||
investment minus depreciation equals net | economic system itself. Capital generates | ||
investment. c. Capital stock at the end of | services over time, and it is used as an | ||
last year plus gross investment this year | input in the production of goods and | ||
equals capital stock at the end of this | services. 40 of 48. | ||
year. d. Net investment equals | 41 | REVIEW TERMS AND CONCEPTS. bond | |
depreciation. 14 of 48. | capital capital income capital market | ||
15 | The Capital Market. capital market The | capital stock depreciation expected rate | |
market in which households supply their | of return financial capital market. human | ||
savings to firms that demand funds to buy | capital intangible capital interest | ||
capital goods. bond A contract between a | interest rate investment physical, or | ||
borrower and a lender, in which the | tangible, capital profit social capital, | ||
borrower agrees to pay the loan at some | or infrastructure stock. 41 of 48. | ||
time in the future, along with interest | 42 | A P P E N D I X. CALCULATING PRESENT | |
payments along the way. financial capital | VALUE. PRESENT VALUE. TABLE 11A.1 Expected | ||
market The part of the capital market in | Profits from a $1,200 Investment Project. | ||
which savers and investors interact | TABLE 11A.1 Expected Profits from a $1,200 | ||
through intermediaries. 15 of 48. | Investment Project. TABLE 11A.1 Expected | ||
16 | The Capital Market. ? FIGURE 11.1 | Profits from a $1,200 Investment Project. | |
$1,000 in Savings Becomes $1,000 of | TABLE 11A.1 Expected Profits from a $1,200 | ||
Investment. 16 of 48. | Investment Project. Year 1. $100. Year 2. | ||
17 | Which of the following constitutes the | 100. Year 3. 400. Year 4. 500. Year 5. | |
demand for capital in the capital market? | 500. All later years. 0. Total. 1,600. 42 | ||
a. Saving. b. Depreciation. c. Investment. | of 48. | ||
d. Financial institutions. 17 of 48. | 43 | A P P E N D I X. CALCULATING PRESENT | |
18 | Which of the following constitutes the | VALUE. present discounted value (PDV), or | |
demand for capital in the capital market? | present value (PV) The present discounting | ||
a. Saving. b. Depreciation. c. Investment. | value of R dollars to be paid t years in | ||
d. Financial institutions. 18 of 48. | the future is the amount you need to pay | ||
19 | The Capital Market. Capital Income: | today, at current interest rates, to | |
Interest and Profits. capital income | ensure that you end up with R dollars t | ||
Income earned on savings that have been | years from now. It is the current market | ||
put to use through financial capital | value of receiving R dollars in t years. | ||
markets. Interest. interest The payments | PRESENT VALUE. 43 of 48. | ||
made for the use of money. interest rate A | 44 | What is the impact of an increase in | |
fee paid annually expressed as a | the interest rate on present value? a. A | ||
percentage of the loan or deposit. 19 of | higher interest rate increases present | ||
48. | value. b. A higher interest rate decreases | ||
20 | How is the decision to undertake a new | present value. c. None. The interest rate | |
investment project made? a. The decision | is not a component of present value. d. A | ||
is based on the expected depreciation | higher interest rate makes the present | ||
schedule of the new asset. b. The decision | value of an investment project more | ||
to undertake a new investment project is | attractive. 44 of 48. | ||
based on the relative contribution of the | 45 | What is the impact of an increase in | |
investment to the capital stock of the | the interest rate on present value? a. A | ||
firm. c. Projects are undertaken as long | higher interest rate increases present | ||
as the revenues likely to be realized from | value. b. A higher interest rate decreases | ||
the investment are sufficient to cover the | present value. c. None. The interest rate | ||
interest payments to the household. d. The | is not a component of present value. d. A | ||
decision to undertake a new investment | higher interest rate makes the present | ||
project is based on the ability of the | value of an investment project more | ||
firm to raise capital. 20 of 48. | attractive. 45 of 48. | ||
21 | How is the decision to undertake a new | 46 | A P P E N D I X. CALCULATING PRESENT |
investment project made? a. The decision | VALUE. PRESENT VALUE. TABLE 11A.2 | ||
is based on the expected depreciation | Calculation of Total Present Value of a | ||
schedule of the new asset. b. The decision | Hypothetical Investment Project (Assuming | ||
to undertake a new investment project is | r = 10 Percent). TABLE 11A.2 Calculation | ||
based on the relative contribution of the | of Total Present Value of a Hypothetical | ||
investment to the capital stock of the | Investment Project (Assuming r = 10 | ||
firm. c. Projects are undertaken as long | Percent). TABLE 11A.2 Calculation of Total | ||
as the revenues likely to be realized from | Present Value of a Hypothetical Investment | ||
the investment are sufficient to cover the | Project (Assuming r = 10 Percent). TABLE | ||
interest payments to the household. d. The | 11A.2 Calculation of Total Present Value | ||
decision to undertake a new investment | of a Hypothetical Investment Project | ||
project is based on the ability of the | (Assuming r = 10 Percent). TABLE 11A.2 | ||
firm to raise capital. 21 of 48. | Calculation of Total Present Value of a | ||
22 | The Capital Market. Capital Income: | Hypothetical Investment Project (Assuming | |
Interest and Profits. Profits. stock A | r = 10 Percent). END OF… $(r). DIVIDED BY | ||
share of stock is an ownership claim on a | (1 + r)t. =. PRESENT VALUE ($). Year 1. | ||
firm, entitling its owner to a profit | 100. (1.1). 90.91. Year 2. 100. (1.1)2. | ||
share. profit The excess of revenues over | 82.65. Year 3. 400. (1.1)3. 300.53. Year | ||
cost in a given period. Functions of | 4. 500. (1.1)4. 341.51. Year 5. 500. | ||
Interest and Profit. Interest may function | (1.1)5. 310.46. Total Present Value. | ||
as an incentive to postpone gratification. | 1,126.06. 46 of 48. | ||
Profit serves as a reward for innovation | 47 | A P P E N D I X. CALCULATING PRESENT | |
and risk taking. 22 of 48. | VALUE. PRESENT VALUE. ? FIGURE 11A.1 | ||
23 | When an entrepreneur starts a new | Investment Project: Go or No? A Thinking | |
business by buying capital with her own | Map. 47 of 48. | ||
savings, that person is: a. Supplying | 48 | A P P E N D I X. CALCULATING PRESENT | |
capital but not demanding capital. b. | VALUE. LOWER INTEREST RATES, HIGHER | ||
Demanding capital but not supplying | PRESENT VALUES. TABLE 11A.3 Calculation of | ||
capital. c. Both supplying and demanding | Total Present Value of a Hypothetical | ||
capital. d. Neither supplying nor | Investment Project (Assuming r = 5 | ||
demanding capital. 23 of 48. | Percent). TABLE 11A.3 Calculation of Total | ||
24 | When an entrepreneur starts a new | Present Value of a Hypothetical Investment | |
business by buying capital with her own | Project (Assuming r = 5 Percent). TABLE | ||
savings, that person is: a. Supplying | 11A.3 Calculation of Total Present Value | ||
capital but not demanding capital. b. | of a Hypothetical Investment Project | ||
Demanding capital but not supplying | (Assuming r = 5 Percent). TABLE 11A.3 | ||
capital. c. Both supplying and demanding | Calculation of Total Present Value of a | ||
capital. d. Neither supplying nor | Hypothetical Investment Project (Assuming | ||
demanding capital. 24 of 48. | r = 5 Percent). TABLE 11A.3 Calculation of | ||
25 | The Capital Market. Financial Markets | Total Present Value of a Hypothetical | |
in Action. ? FIGURE 11.2 Financial Markets | Investment Project (Assuming r = 5 | ||
Link Household Saving and Investment by | Percent). END OF… $. DIVIDED BY (1 + r)t. | ||
Firms. 25 of 48. | =. PRESENT VALUE ($). Year 1. 100. (1.05). | ||
26 | Which of the following mechanisms are | 95.24. Year 2. 100. (1.05)2. 90.70. Year | |
used to channel household savings into | 3. 400. (1.05)3. 345.54. Year 4. 500. | ||
investment projects? a. Business loans b. | (1.05)4. 411.35. Year 5. 500. (1.05)5. | ||
Venture capital c. Retained earnings d. | 391.76. Total Present Value. 1,334.59. 48 | ||
The stock market e. All of the above. 26 | of 48. | ||
of 48. | 49 | A P P E N D I X. CALCULATING PRESENT | |
27 | Which of the following mechanisms are | VALUE. If the present value of an expected | |
used to channel household savings into | stream of earnings from an investment | ||
investment projects? a. Business loans b. | exceeds the cost of the investment | ||
Venture capital c. Retained earnings d. | necessary to undertake it, then the | ||
The stock market e. All of the above. 27 | investment should be undertaken. However, | ||
of 48. | if the present value of an expected stream | ||
28 | The Capital Market. Mortgages and the | of earnings falls short of the cost of the | |
Mortgage Market. Most real estate in the | investment, then the financial market can | ||
United States is financed by mortgages. A | generate the same stream of income for a | ||
mortgage, like a bond, is a contract in | smaller initial investment, and the | ||
which the borrower promises to repay the | investment should not be undertaken. LOWER | ||
lender in the future. Until the last | INTEREST RATES, HIGHER PRESENT VALUES. 49 | ||
decade, most mortgage loans were made by | of 48. | ||
banks and savings and loans. In recent | 50 | REVIEW TERMS AND CONCEPTS. present | |
years, most mortgages were written by | discounted value (PDV) or present value | ||
mortgage brokers or mortgage bankers who | (PV). 50 of 48. | ||
PowerPoint Lectures for Principles of Microeconomics, 9e By Karl E. Case, Ray C. Fair Sharon M. Oster.ppt |
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