Why are market prices necessary to compute a firm’s total capital?
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Why are market prices necessary to compute a firm’s total capital?
Started by Murphy, Sep 05 2005 03:58 PM
4 replies to this topic
#2
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Posted 17 September 2007 - 07:41 PM
Murphy, on Sep 5 2005, 04:58 PM, said:
Why are market prices necessary to compute a firm’s total capital?
Since the purpose of determining one's capital is to ultimately find whether it is increasing or decreasing - market prices are a necessary component for understanding that desire. The price paid is in the past, and is nothing more than a historical fact. What matters to the firm is the current market price of the goods the firm posesses. That market price represents the competing uses of that good and it's market value (and no one individual or organization can determine that market price). Thus, if I paid $1000 in 1995 for a program which would find 'year 2000' problems in computers I might find that I could have sold it for $5000 in July 1999 but only $50 in July 2000. What is its capital value? It isn't the price I paid, or the highest possible price. It is the market price of that good (program) at the moment I am making the determination. This holds true for all the other goods that I sum together to find my total capital.
#3
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Posted 29 October 2007 - 02:21 PM
Doug K, on Sep 17 2007, 07:41 PM, said:
Since the purpose of determining one's capital is to ultimately find whether it is increasing or decreasing - market prices are a necessary component for understanding that desire. The price paid is in the past, and is nothing more than a historical fact. What matters to the firm is the current market price of the goods the firm posesses. That market price represents the competing uses of that good and it's market value (and no one individual or organization can determine that market price). Thus, if I paid $1000 in 1995 for a program which would find 'year 2000' problems in computers I might find that I could have sold it for $5000 in July 1999 but only $50 in July 2000. What is its capital value? It isn't the price I paid, or the highest possible price. It is the market price of that good (program) at the moment I am making the determination. This holds true for all the other goods that I sum together to find my total capital.
Well, you seem to be explaining why anticipated market prices, rather than past ones, are used. But why use them at all? Why not just say, "My capital consists of 100 tractors, fourteen thousand gallons of diesel fuel, ..." ?
You answer this question too in the beginning, when you say we need to know if it's decreasing or increasing. So to reduce all of these different things to a common denominator, you need money prices for all of them.
Your answer had all this in it; I was just clarifying.
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Posted 15 July 2008 - 07:02 PM
Prices help to plan for the future. Adding up all resources allows entrepreneurs to figure how much income they have today that could be used in consumption while not hurting the future. Adding up today's and then tomorrow's capitals allows us to see gains and losses in capital consumption, and then adjust for tomorrow's production.
#5
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Posted 20 August 2008 - 05:15 PM
Mart Grams, on Jul 15 2008, 07:02 PM, said:
Prices help to plan for the future. Adding up all resources allows entrepreneurs to figure how much income they have today that could be used in consumption while not hurting the future. Adding up today's and then tomorrow's capitals allows us to see gains and losses in capital consumption, and then adjust for tomorrow's production.
Right, and just to drive the point home, entrepreneurs couldn't do these steps you list, without having market prices to do the calculations.
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