Chapter 13 - Capital, Interest, Entrepreneurship, and Corporate Finance

In both production and consumption, time is critical. In this part, we will first look at the importance of time in production decisions, and then we will look at why companies borrow household money. Following that, we look at the role of time in consumption decisions and explain why families are rewarded for saving or deferring consumption. We determine the market interest rate by bringing together borrowers and savers.

You are prepared to spend more to consume now rather than wait because you value now consumption more than future consumption. Prices frequently reflect this increased willingness to spend. Consider the cinema. You pay almost twice as much for renting a DVD or downloading it three months later. The same holds true, in the case of books. You may save more than half the price of a hardback by waiting for the paperback price. Photo labs, dry cleaners, fast-food restaurants, and furnishings businesses are all promising. Same-day delivery, cable news networks, and other providers promote the rapidity of their services, recognizing that customers desire early access. As a result, impatience is one.

People must be compensated to postpone consuming—to defer gratification—because they value now consumption more than future consumption. People forego present spending in exchange for a better potential to consume in the future by saving a part of their wages in financial institutions such as banks.

The incentive for deferring is interest consumption. The interest rate is the annual incentive for saving expressed as a percentage of the principal monetary value saved. For instance, if the interest rate is 5%, the incentive, or interest, is 5%.

For every $100 saved, you'll save $5 every year. Other factors being equal, the greater the interest rate, the more customers are rewarded for saving, therefore the more they save, the more they save.

Information, or so-called intellectual property, is one potentially valuable capital resource. It is an intangible asset generated by human knowledge and ideas. Intellectual property is expensive to create, but once created, it may be given at a low cost. For instance, the first copy of a new product.

Microsoft's Windows operating system may have cost more than $1 billion to build, but each additional copy can be streamed for free via the Internet. Immediately after

When Microsoft sells a copy of the product, the initial client becomes a prospective provider of that product.

Because of this unique supply characteristic, the original manufacturer frequently has problems regulating the distribution and may have difficulty receiving payment. To address these issues, the United States Constitution gives Congress the authority “to promote the Progress of Science and useful Arts, by securing for certain Times to Authors and Artists.”

Inventors have the sole right to exploit their own works and discoveries.” This was the sole “Right” enshrined in the United States Constitution when it was first approved by the states (the first 10 amendments to the Constitution, known as the Bill of Rights, were approved later).

So far, we've looked at the investment choice for a single golf course, but the United States has approximately 16,000 golf courses. The industry demand for golf carts demonstrates the link between the amount invested by all courses and the projected rate of return. The investment demand curve is similar to the step-like pattern in Exhibit 1.

The golf industry is sloping downward. The lower the market interest rate, the more invested using golf carts.