In the last chapter, we examined two of the three categories of input markets: labor and land. In this chapter we will study the unique nature of capital markets. We will develop the connections between household savings and firm investment. We will also see how the interest rate in the economy has an effect on the supply and demand for capital. By the end of this chapter, you should be able to answer the following questions:

1. What are the different forms of capital?


2. How is capital measured?


3. What is the difference between investment and depreciation?


4. How does money that a household saves become capital used by a firm?


5. What are some of the ways firms can acquire the money to buy capital?


6. How does a firm decide whether to buy capital?

• Readiness Assessment Quiz