Session Overview
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During most of our discussion of consumer decisions and the production decisions of firms, we have focused on only labor and the decisions that individuals make about whether or not to work. We know from our study of production functions that firms also use capital to produce output. Where does capital come from? Not surprisingly, it is the result of another consumer decision, the decision of whether or not to save. This lecture analyzes the decisions consumers and firms make in the capital market. Inflation rates change the value of a dollar from year to year. This image is in the public domain. Source: Wikipedia. |
Keywords: Capital markets; intertemporal choice; present value; future value; inflation; real interest rate; compounding.
Session Activities
Readings
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [R&T] Chapter 13, "Interest Rates and the Markets for Capital and Natural Resources."
- [Perloff] Chapter 16, "Interest Rates, Investments, and Capital Markets." (optional)
Lecture Videos
View Full Video
View by Chapter
- Introduction to Capital Markets (00:07:36)
- Intertemporal Choice (00:13:56)
- Intertemporal Choice: Change in Interest Rate (00:05:33)
- Calculating Present Value (00:08:49)
- Calculating Future Value and Compounding (00:07:18)
- Accounting for Inflation: Real Interest Rate (00:05:04)
Resources
Check Yourself
Concept Quiz
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.