Physical Capital.

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Presentation transcript:

Physical Capital

Physical Capital vs Financial Capital Physical – machines, factories, office buildings, etc Depreciation occurs = gradual decline in productivity Financial – funds used to purchase or rent physical capital Debt contract = loans or bonds Equity contract = stock/shares of ownership

Rental Markets Price = rental price of capital Marginal Revenue Product of capital = change in total revenue due to a one unit increase in capital Assume it declines as more capital employed A firm will rent until MRP of capital = rental price

Demand Curve for Capital Downward sloping If MRP changes, demand curve for capital will shift Marginal Revenue Product of Capital Rental Price of Capital Firm’s quantity of capital

Market Demand and Supply Can be used to determine effect of taxes and subsidies Economic rent = price of something with fixed supply Quantity of Capital in the market Rental Price of Capital Market Supply of Capital Market Demand for capital Rental Price of Capital Quantity of Capital in the market

Ownership of Physical Capital Concepts are similar Implicit rental price = cost of the funds used to buy the capital plus depreciation of capital Demand curve is downward sloping (just like when renting)