15.3 The Demand for Capital LO 3
Profit-maximizing firms will purchase capital up to the point at which
the present value of the future stream of MRPs generated by the last
unit of capital equals its purchase price.
Economists focus on the relationship between the interest rate and
firms’ desired capital stock; an increase in the interest rate reduces
the present value of any given stream of future MRPs and thus
reduces firms’ desired capital stock.
Since firms require financial capital to finance their investment in
additional capital equipment, the economy’s demand for financial
capital comes from the many individual firms’ demand for
investment. An increase in the interest rate leads to a decline in firms’
quantity of investment demanded.
An increase in the marginal product of capital increases firms’ desired
capital stock at any given interest rate and therefore leads to an
increase in the economy’s demand for financial capital. This is
represented by a rightward shift in the economy’s investment demand
curve.