Authors libby rittenberg 690

calculation aids the decision maker in determining whether or not to
pursue an investment project.
2. Explain the demand curve for capital and the factors that can cause it
to shift.
3. Explain and illustrate the loanable funds market and explain how
changes in the demand for capital affect that market and vice versa.
The quantity of capital that firms employ in their production of goods and
services has enormously important implications for economic activity and
for the standard of living people in the economy enjoy. Increases in capital
increase the marginal product of labor and boost wages at the same time
they boost total output. An increase in the stock of capital therefore tends
to raise incomes and improve the standard of living in the economy.
Capital is often a fixed factor of production in the short run. A firm cannot
quickly retool an assembly line or add a new office building. Determining
the quantity of capital a firm will use is likely to involve long-run choices.

The Demand for Capital
A firm uses additional units of a factor until marginal revenue product
equals marginal factor cost. Capital is no different from other factors of
production, save for the fact that the revenues and costs it generates are
distributed over time. As the first step in assessing a firm’s demand for
capital, we determine the present value of marginal revenue products and
marginal factor costs.

Capital and Net Present Value
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

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