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Introduction :
Capital Market, Consumption
and Investment
Introduction
Consider, a one-person/one-good economy or a
single person economy. The decision maker must
choose between consumption now and
consumption in the future. The decision not to
consume now is the same as investment. Thus his
decision is simultaneously one of consumption
and investment. In order to decide, he needs two
types of information subjective trade-offs between consumption
now and consumption in the future i.e. the
utility and indifference curves
the feasible trade-offs between present and
future consumption i.e. the investment and
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Copeland, Weston & Shastri
production opportunity
sets.
Introduction
From the analysis of a one-person/one-good
economy, a subjective interest rate is
determined
by
the
optimal
consumption/investment
decision
which
represents the optimal rate of exchange
between consumption now and in the future.
Again it can be called the price of deferred
consumption or the rate of return on
investment.
Individual with different subjective interest rate
select
different
consumption/investment
decision choices.
Copeland, Weston & Shastri
Introduction
Opportunities to exchange consumption
across time by borrowing or lending in a
multiple
person
or
exchange
economy results in a single market
interest rate that everyone can use as a
signal
for
making
optimal
consumption/investment decisions.
So when no one is worse off and almost
everyone is better off in an exchange
economy compared with a single person
economy, it can be said an ex change
economy is superior to an economy
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Copeland, Weston & Shastri
without exchange.
Introduction
And
capital
markets
help
to
allocate/exchange resources from one to
another. So the ultimate question arise"Do capital markets benefit society?"
The answer requires to compare a world
without capital markets to one with capital
markets to show that no one is worse off
and that at least one individual is better
off in a world with capital markets.
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Outlay
RR (%)
1000000
1000000
20
2000000
3000000
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2.
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Total Trips= N
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Understanding Capacity
Testing
There are 12 individuals and 12
consumption goods in the economy & the
cost of each leg of a trip is BDT. 50.
I. If there is no market place, then how many trips each
individual makes? How many trips all individuals
altogether make? What will be the total cost?
II. If market place exists, then then how many trips each
individual makes? How many trips all individuals
altogether make? What will be the total cost?
III. Is anyone better off or worse off for having market
place? If yes, how much?
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Best of Luck!!!
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