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Physical Capital.

Published byBasil Henry Modified over 5 years ago

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Presentation on theme: "Physical Capital."— Presentation transcript:

1 Physical Capital

2 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

3 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

4 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

5 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

6 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)

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