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1. Mises Academy
Austrian Econ I:
Praxeology Through Price Theory
Robert P. Murphy
Spring 2011
Lecture 8
June 15

2. 2nd
half Chapter 4
I. Elasticity
II. Complementarity
III. Pricing Durable Goods
IV. Mainstream Utility
Results
V. Indifference Curves
VI. Subjective vs. Market
Value

3. I. Elasticity
The more substitutes for a good, the
more elastic will its demand tend to
be.

4. II. Complementarity

5. III. Pricing Durable Goods

6. A. Rent
Rent - the price of buying the
services of a durable good for a
period of time.

7. 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).

8. 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.

9. 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%.

10. IV. Mainstream Utility Results
Mainstream texts say that
consumers adjust purchases of
goods such that:
(MUx / Px) = (MUy / Py)
Or
(MUx / MUy) = (Px / Py)

11. V. Indifference Curves

12. VI. Subjective vs. Market Value