Supply of Capital
In fact, most capital is owned by firms, who in effect rent it to themselves. Households supply the funds, called financial capital that firms use to buy capital. Households lend some of these050-664 funds to firms by buying their stocks and bonds and by making deposits in banks, which the banks lend to firms. Households also lend funds to firms in the form of retaining earnings, profits that have not been paid out to the firm's owners, their stockholders.
The total amount of capital that firms can acquire and use depends on the total quantity of financial capital. This quantity is a stock, a quantity at a point in time. The stock of financial capital depends on the amounts of that households have saved in previous years. Saving is the flow, a quantity per year that adds to the stock of financial capital.
The most important factors determining the household's savings are current income and expected future income and let's not forget the interest rate.
A household with the current income that is low compared with its expected future income saves little and might even have a negative saving. A household with the current income that is high compared with its expected future income saves a great deal in the present in order to be able to consume more in the future. The Stage in the household's life cycle is the main factor influencing whether current income is high or low compared with expected future income. Young households050-632 typically have a low current income compared with the expected future income, while older working households have a high current income relative to their expected future income. The consequence of this pattern in income over the life cycle is that young people have negative saving and older working people are positive saving. Thus the young incur debts such as consumer credit to acquire durable goods and to consume more than their income, while older working people save and accumulate assets often in the form of pension and life insurance arrangements to provide for their retirement years.
The interest rate is the opportunity cost of consuming in050-676 the current year rather than in the following year. If the interest rate is 10% a year, $100.00 consumed in the current year costs hundred and $10.00 of consumption in the following year. So by consuming hundred dollars in the current year rather than in the following year, consumption falls by $10.00 or 10% of current consumption. Equivalently, $100.00 saved not consumed in the current year brings the possibility of increasing consumption by $110.00 in the following year, a net increase in consumption of $10.00 or 10%.
The total amount of capital that firms can acquire and use depends on the total quantity of financial capital. This quantity is a stock, a quantity at a point in time. The stock of financial capital depends on the amounts of that households have saved in previous years. Saving is the flow, a quantity per year that adds to the stock of financial capital.
The most important factors determining the household's savings are current income and expected future income and let's not forget the interest rate.
A household with the current income that is low compared with its expected future income saves little and might even have a negative saving. A household with the current income that is high compared with its expected future income saves a great deal in the present in order to be able to consume more in the future. The Stage in the household's life cycle is the main factor influencing whether current income is high or low compared with expected future income. Young households050-632 typically have a low current income compared with the expected future income, while older working households have a high current income relative to their expected future income. The consequence of this pattern in income over the life cycle is that young people have negative saving and older working people are positive saving. Thus the young incur debts such as consumer credit to acquire durable goods and to consume more than their income, while older working people save and accumulate assets often in the form of pension and life insurance arrangements to provide for their retirement years.
The interest rate is the opportunity cost of consuming in050-676 the current year rather than in the following year. If the interest rate is 10% a year, $100.00 consumed in the current year costs hundred and $10.00 of consumption in the following year. So by consuming hundred dollars in the current year rather than in the following year, consumption falls by $10.00 or 10% of current consumption. Equivalently, $100.00 saved not consumed in the current year brings the possibility of increasing consumption by $110.00 in the following year, a net increase in consumption of $10.00 or 10%.
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