Expected rates of return
- How does business make investment decisions?
- Cost/Benifit Analysis
- How does business determine the benefits?
- Expected rate of return
- How does business count the cost?
- Interest costs
- How does business determine the amount of investment?
- Nominal is the observable rate of interest. Real subtracts out inflation and is only known ex post facto.
- r% = i% - pi%
- real interest rate (r%) determines the cost
- Downward sloping
- Cost of production, business taxes, technological change, stock of capital and expectations.
- The level of Real GDP that firms will produce at each price level (PL)
- Long run- time where input prices are completely flexible. Always be vertical.
- Short run - time where input prices are sticky and not adjust to change in price level. Determinants.
- (LRAS) long run aggregate supply marks the level of full employment in the economy (analogous to PPC)
- Input prices are sticky in short run the SRAS is upward sloping.
- Increase in SRAS is seen as a shift to the right
- Decrease in SRAS is seen as a shift to the left
- They key to understanding shifts in SRAS is per unit cost of production
- Per unit production cost = total input/ total output
- Input prices, productivity, legal institutional environment.
- Input prices - made or sold in U.S. Wages, cost of capital, raw materials. Strung $ = lower foreign weaker $ = higher foreign. Market Power - monopolies and cartels that control resources control the price of those resources. Increase in resources price = SRAS <- decrease in resources price = SRAS ->
- Productivity = output/inputs. More productivity = lower unit production cost = SRAS -> Lower = higher production cost = SRAS <-
- legal institutional environment - taxes and subsides is taxes on business increase per unit cost = SRAS <- subsides to business reduce per unit production cost = SRAS -> Govt regulation creates a cost of compliance = SRAS <- Deregulation reduces compliance costs = SRAS ->
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