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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Capital
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Physical Capital
• Durable equipment
• Residential structures
• Inventories
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Social Capital
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Intangible Capital
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Human Capital
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Measuring Capital
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Investment
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Private Investment in the U.S.
Economy, 1999
Private Investment in the U.S. Economy, 1999
BILLIONS OF AS A PERCENTAGE AS A
CURRENT OF TOTAL GROSS PERCENTAGE
DOLLARS INVESTMENT OF GDP
Nonresidential structures 285.6 17.3 3.1
Equipment and software 917.4 55.6 9.9
Change in inventories 43.3 2.6 0.5
Residential structures 403.8 24.5 4.3
Total gross private investment 1,650.1 100.0 17.8
depreciation 961.4 58.3 10.3
Net investment = 688.7 41.7 7.5
gross investment minus depreciation
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
$1,000 in Savings Becomes $1,000 of Investment
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Bond Lending
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Capital Income: Interest and Profit
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Financial Capital Markets in Action
• Venture capital
• Retained earnings
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Financial Markets Link Household
Saving and Investment by Firms
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Capital Accumulation and Allocation
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Forming Expectations
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand for New Capital and the
Investment Decision
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Comparing Costs and Expected Return
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of the
Expected Rate of Return
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Menu of Investment Choices and
Expected Rates of Return
Potential Investment Projects and Expected Rates of Return for a Hypothetical Firm,
Based on Forecasts of Future Profits Attributable to the Investment
(1) (2)
TOTAL EXPECTED RATE
INVESTMENT OF RETURN
PROJECT (DOLLARS) (PERCENT)
A. New computer network 400,000 25
B. New branch plant 2,600,000 20
C. Sales office in another state 1,500,000 15
D. New automated billing system 100,000 12
E. Ten new delivery trucks 400,000 10
F. Advertising campaign 1,000,000 7
G. Employee cafeteria 100,000 5
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Menu of Investment Choices and
Expected Rates of Return
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Investment Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Profit-Maximizing
Investment Decision
MRPK = PK
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Present Value