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ECO 304L
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Econ Notes Pg. 276-281 and 267-276 1. Capital Markets a. Capital- Includes all manufactured products that are used to produce goods and services b. Capital Markets- markets in which firms obtain financial resources to purchas capital goods. i. Financial resources come from the savings of households and other firms ii. Suppliers of funds and emanders of these funds interact through the loanable funds market 1. Determine interest rates 2. Investment a. Market determines equilibrium rate of interest and an individual firm will take this rate of intereset, or cost of capital and determine how much to invest 3. Present Value Approach a. Present value- The value of an investment, today, the higher the discount rate, the lower the present value today b. PV=X/i i. PV= Present value, X is annual income, I is market interest rate c. Annuity- financial instrument that pays the owner a certain amount of money for ever. d. PV=X/(1+i)^n i. For 1 payment 4. Rate of Return Approach a. Rate of Return Approach- Uses the present value formula, but subtracts cost and finds the interest rate at which the investment would break even b. PV= EXn/(1+i)^n – C i. E= Sigma 5. Land a. Natural sense and other natural resources that are inelastically supplied i. Rent- any return or income that flows to land as a factor of production 6. Entrepreneurship- receive profits for combining land labor and capital to produce goods and services and assuming the risks associated withproducing these goods and services 267-76 1. CompetitiveLabor Demand a. Demand for Labor- demand for labor is derived from the demand for the firms prodt and the productivity of labor 2. Marginal Revenue of Product a. 1 worker makes 15 products which are sold for 10 dollars each, worker is worth
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