During most of our discussion of consumer decisions and the production decisions of firms, we have focused on only labor and the decisions that individuals make about whether or not to work. We know from our study of production functions that firms also use capital to produce output. Where does capital come from? Not surprisingly, it is the result of another consumer decision, the decision of whether or not to save. This lecture analyzes the decisions consumers and firms make in the capital market.
Inflation rates change the value of a dollar from year to year. This image is in the public domain. Source: Wikipedia.
Keywords: Capital markets; intertemporal choice; present value; future value; inflation; real interest rate; compounding.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
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- Lecture 21: Capital Supply and Markets I (00:48:22)
Lecture 21: Capital Supply and Markets I
- Transcript (PDF)
View by Chapter
- Introduction to Capital Markets (00:07:36)
Introduction to Capital Markets
- Intertemporal Choice (00:13:56)
- Intertemporal Choice: Change in Interest Rate (00:05:33)
Inter-temporal Choice: Change in Interest Rate
- Calculating Present Value (00:08:49)
Calculating Present Value
- Calculating Future Value and Compounding (00:07:18)
Calculating Future Value and Compounding
- Accounting for Inflation: Real Interest Rate (00:05:04)
Accounting for Inflation: Real Interest Rate
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
These optional resources are provided for students that wish to explore this topic more fully.
See the [Perloff] companion website for an overview of the main topics covered in the chapter, as well as quizzes, applications, and other related resources.