Understanding Capital Demand and Supply
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ScribdTranslationsUnderstanding Capital Demand and Supply
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ScribdTranslationsTheme 5
1. Capital Demand
In terms of economics, demand is the quantity and quality of
goods and services that can be purchased, at different prices
what the market proposes, by the consumers at a moment
determined.
Now, the demand for capital is a derived demand, the
the interest to be paid depends on the profitability expectations
of business projects and the lower the rate is
more interest will be required for the amount of capital. The capital that
The entrepreneur will invest from savings.
The capital demand of a company comes from its demand for
physical capital and the amount that the company plans to borrow in
a fixed period is determined by its planned investment, that is
for their plans to purchase new capital. This decision is
driven by its attempt to maximize its profit to the extent that
that a company increases the amount of capital employed, if everything
the rest remains constant, the marginal product income of the
capital decreases. To maximize its profit, a company
increase the size of the substitute and use more capital if the income of
the marginal product of capital exceeds the price of the same capital.
But the IPMg of capital in the future, insofar as capital is held.
what to pay in the present. Therefore, the company must convert to
a present value of the future marginal product revenues for
that can be compared with the current price of the capital equipment.
To carry out this conversion, the discount technique is used.
The capital demand curve of a company shows the
relationship between the amount of capital demanded by the company and the
interest rate, if all other things remain the same.
2. Capital Offer
The amount of capital offered is the result of decisions made by
savings of individuals. The main factors that determine the
savings are:
Income: Saving is the act of converting current income into
future consumption. If the other factors remain unchanged,
the higher their income, the more savings there are, the relationship between the
savings and income are relatively constant.
The expected future income: If the current income is high and your income
expected future is low, it will have a high level of savings. But if the
current income is low and their expected future income is high, they will have
a low level of savings (perhaps even negative)
The interest rate: One monetary unit saved today
will turn into a currency unit tomorrow plus the interest
from the past. The higher the interest rate, the greater it is
the amount to which a monetary unit will convert in the future
today.
Capital supply curve: The capital supply curve shows
the relationship between the quantity of capital offered and the interest rate,
when other factors remain unchanged. An increase
an increase in the interest rate causes an increase in the quantity supplied
of capital and a movement along the supply curve.
3. Circular Model of Income
The circular flow of income is a model that explains the movement
of money that passes through the hands of different agents
economic factors that are present in an economy.
These agents rely on the market to distribute resources,
establishing relationships around two markets
complementary:
The market for goods and services, where companies sell to
the families the goods and services that they demand in exchange for
money.
The market for factors of production, where families contribute
the factors of production (labor, land, and capital) to the companies,
in exchange for a compensation (salaries, rents, interests and
benefits)
This relationship can be described as a circular flow in the
that first some sell and others buy, and then some buy and
others sell. The money that consumers give to the
entrepreneurs for the purchase of goods and services, returns to these in
form of wages, rents, and benefits.
Quesnay maintained that there were two types of flows in an economy:
the real flow and the financial or monetary flow.
Real flow: The real flow refers to the factors of production,
and to goods and services.
Cash flow: Cash flow is related to the money that
goes from one agent to another in exchange for those factors of
production of goods and services.
For example: when we buy shoes, there is a real flow and
a cash flow. The real flow is the shoes we receive and the
cash flow the money we pay for them.