13.4 Review and Practice Summary Time is the complicating factor when we analyze capital and natural resources Because current choices affect the future stocks of both resources, we must take those future consequences into account And because a payment in the future is worth less than an equal payment today, we need to convert the dollar value of future consequences to present value We determine the present value of a future payment by dividing the amount of that payment by (1 + r)n, where ris the interest rate and n is the number of years until the payment will occur The present value of a given future value is smaller at higher values of n and at higher interest rates Interest rates are determined in the market for loanable funds The demand for loanable funds is derived from the demand for capital At lower interest rates, the quantity of capital demanded increases This, in turn, leads to an increase in the demand for loanable funds In the aggregate, the supply curve of loanable funds is likely to be upwardsloping We assume that firms determine whether to acquire an additional unit of capital by (NPV) of the asset When NPV equals zero, the present value of capital’s marginal revenue product equals the present value of its marginal factor cost The demand curve for capital shows the quantity of capital demanded at each interest rate Among the factors that shift the demand curve for capital are changes in expectations, new technology, change in demands for goods and services, and change in relative factor prices Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 726