2. Measuring k.

   1. Though K isn’t identical to money, still the stock of K is measured in money terms.

   2. K is a stock concept (Measured at a certain date).

   3. Analyzing K we introduce the notions of Investment and depreciation  both are flow concepts.

   4. Investment is a flow that increases the stock of K. 3 major reasons:

      1. Inv occurs when e.g. a firm buys new equipment.

      2. This happens as equipment wares off and is to be replaced.

      3. Inv takes place, when the firm needs to innovate and expand.

   5. Depreciation is the opposite flow, which decreases the economic value of an asset over time.

   6. How does the firm invest?

      1. Ask for a loan. Demand the loanable funds and may get them the financial market. The households supply loanable funds to the market, as they make decision to save. So, another way is to:

      2. Sell bills/bonds to the households.

   7. A s K exists over time, it’s possible to separate K services. Buying equipment  purchase of K, but if you hire it (lease) you use one of K services.

3. Capital Equipment	Owner Can	It brings
   	Use in production Sell it  Hire it out	Profit Price of equipment Rentals

   D emand and Supply for K services.

1. Sr rentals include:

   1. Depreciation

   2. Repairing and maintenance costs, as to rent equipment a firm needs to keep it in good condition.

2. LR rentals include also the third component: opportunity cost of buying additional equipment.

   1. Demand and Supply for k purchase.

3. The case when equipment is bought by investors. Equilibrium: MRPK = MRCK.

4. Costs are born now, but benefits will be received later. How to compare the benefits/costs of different periods? A discounting technique is used.

5. E.g.:

Money	Interest Rate
X =100 (today) 110 121 R=133,1 (3 years from now)	10% 10% 10% etc…

133,1 3 years from now, is exactly the same as 100 today. To compare future and today’s $, we need to take them to the same basis.

t –time. r – discount rate.

Another method to analyze the efficiency of investment is to use the notion of the Internal Rate of Return(IRR). IRR – rate of discount, at which NPV=0.

MEI  Marginal Efficiency of Investments  determines the Demand for inv. Inversely related to r, as r is the opportunity cost of investment:

• If you have your own money. If you put it in a bank, you receive interest. If you invest – you get profit. But if you invest, you lose interest – it is the opportunity cost of investment.

• If you need $ to invest. You take it from a bank as a loan and pay interest. It is the direct cost for investment.

1. Land.

In every country Q of land is fixed =>  capitalized rent.

It shows, what sum of $ should be put in a bank in order to receive the interest, equal to the annual rent (at a given market interest rate).