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Mises AcademyAustrian Econ I:
Praxeology Through Price Theory
Robert P. MurphySpring 2011
Lecture 8June 15
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2nd half Chapter 4
I. ElasticityII. ComplementarityIII. Pricing Durable GoodsIV. Mainstream Utility Results
V. Indifference Curves VI. Subjective vs. Market Value
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I. Elasticity
The more substitutes for a good, the more elastic will its demand tend to be.
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II. Complementarity
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III. Pricing Durable Goods
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A. Rent
Rent - the price of buying the services of a durable good for a period of time.
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B. Capitalization
The purchase price (i.e. capital value) of a durable good is the present discounted value of its expected flow of future rents (i.e. services).
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C. Capital Gains/Losses
Mistaken forecasts of future rental income will lead to capital gains or capital losses.
E.g. apartment building expected to yield $10,000 in rent per year, forever, at 5% interest. Original price $200,000.
After purchase, owner realizes can only rent out for $9,000 per year. New appraisal: Building worth $180,000. Owner suffers a one-time capital loss of $20,000.
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D. Interest Income
Reaping larger money balances over time, due to investment in durable goods, does not constitute a capital gain (a form of profit) but rather constitutes interest income.E.g. apartment building expected to yield $10,000 in rent
per year, forever, at 5% interest. Original price $200,000.
Each year, owner receives cash flow of $10,000. This can be spent on consumption w/o impairing capital value of asset. Same as investing $200k in bonds at 5%.
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IV. Mainstream Utility Results
Mainstream texts say that consumers adjust purchases of goods such that:
(MUx / Px) = (MUy / Py)
Or
(MUx / MUy) = (Px / Py)
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V. Indifference Curves
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VI. Subjective vs. Market Value