WEBVTT NOTE 4.07. The Prices of Durable Goods and Their Services 1 00:00:00.000 --> 00:00:07.480 7. The Prices of Durable Goods and Their Services 2 00:00:07.480 --> 00:00:14.400 Why does a man purchase a consumer's good? As we saw back in Chapter 1, a consumer's 3 00:00:14.400 --> 00:00:20.160 good is desired and sought because the actor believes that it will serve to satisfy his 4 00:00:20.160 --> 00:00:27.540 urgently valued desires, that it will enable him to attain his valued ends. In other words, 5 00:00:27.540 --> 00:00:33.800 The good is valuable because of the expected services that it will provide. 6 00:00:33.800 --> 00:00:41.500 Tangible commodities then, such as food, clothing, houses, etc., and intangible personal services, 7 00:00:41.500 --> 00:00:48.260 such as medical attention and concert performances, are similar in the life of the consumer. 8 00:00:48.260 --> 00:00:56.020 Both are evaluated by the consumer in terms of their services in providing him with satisfactions. 9 00:00:56.020 --> 00:01:03.120 Every type of consumer's good will yield a certain amount of services per unit of time. 10 00:01:03.120 --> 00:01:06.460 These may be called unit services. 11 00:01:06.460 --> 00:01:11.120 When they are exchangeable, these services may be sold individually. 12 00:01:11.120 --> 00:01:17.240 On the other hand, when a good is a physical commodity and is durable, it may be sold to 13 00:01:17.240 --> 00:01:26.400 to the consumer in one piece, thereby embodying an expected future accrual of many unit services. 14 00:01:26.400 --> 00:01:33.100 What are the interrelations among the markets for and prices of the unit services and the 15 00:01:33.100 --> 00:01:36.080 durable good as a whole? 16 00:01:36.080 --> 00:01:41.920 Other things being equal, it is obvious that a more durable good is more valuable than 17 00:01:41.920 --> 00:01:47.600 and a less durable good, since it embodies more future unit services. 18 00:01:47.600 --> 00:01:54.440 Thus, suppose that there are two television sets, each identical in service to the viewer, 19 00:01:54.440 --> 00:01:59.920 but that A has an expected life of five years and B of ten. 20 00:01:59.920 --> 00:02:07.440 Though the service is identical, B has twice as many services as A to offer the consumer. 21 00:02:07.440 --> 00:02:15.000 On the market then, the price of B will tend to be twice the price of A. Strictly this 22 00:02:15.000 --> 00:02:20.400 is not correct, and the important qualification will be added later. 23 00:02:20.400 --> 00:02:26.240 Since as a result of time preference, present services are worth more than the same ones 24 00:02:26.240 --> 00:02:31.840 in the future, and those in the near future more than those in the far future, the price 25 00:02:31.840 --> 00:02:36.820 of B will be less than twice the price of A. 26 00:02:36.820 --> 00:02:42.320 For non-durable goods, the problem of the separate sale of the service of the good and 27 00:02:42.320 --> 00:02:45.540 of the good itself does not arise. 28 00:02:45.540 --> 00:02:51.480 Since they embody services over a relatively short span of time, they are almost always 29 00:02:51.480 --> 00:02:53.320 sold as a whole. 30 00:02:53.320 --> 00:03:00.520 Butter, eggs, Wheaties, etc. are sold as a whole, embodying all their services. 31 00:03:00.520 --> 00:03:03.840 Few would think of renting eggs. 32 00:03:03.840 --> 00:03:09.240 Personal services, on the other hand, are never sold as a whole, since on the free market 33 00:03:09.240 --> 00:03:11.920 slave contracts are not enforceable. 34 00:03:11.920 --> 00:03:19.100 Thus, no one can purchase a doctor or a lawyer or a pianist for life to perform services 35 00:03:19.100 --> 00:03:22.080 at will with no further payment. 36 00:03:22.080 --> 00:03:27.400 Personal services, then, are always sold in their individual units. 37 00:03:27.400 --> 00:03:33.600 The problem, whether services should be sold separately or with the good as a whole, arises 38 00:03:33.600 --> 00:03:40.600 in the case of durable commodities, such as houses, pianos, tuxedos, television sets, 39 00:03:40.600 --> 00:03:41.880 etc. 40 00:03:41.880 --> 00:03:49.520 We have seen that goods are sold not as a total class, for example, bread or eggs, but 41 00:03:49.520 --> 00:03:57.820 in separate homogeneous units of their supply, such as loaves of bread or dozens of eggs. 42 00:03:57.820 --> 00:04:04.060 In the present discussion, a good can be sold either as a complete physical unit, a house, 43 00:04:04.060 --> 00:04:10.140 a television set, etc., or in service units over a period of time. 44 00:04:10.140 --> 00:04:17.580 This sale of service units of a durable good is called renting, or renting out, or hiring 45 00:04:17.580 --> 00:04:19.380 out the good. 46 00:04:19.380 --> 00:04:23.880 The price of the service unit is called the rent. 47 00:04:23.880 --> 00:04:29.800 Since the good itself is only a bundle of expected service units, it is proper to base 48 00:04:29.800 --> 00:04:33.080 our analysis on the service unit. 49 00:04:33.080 --> 00:04:39.540 It is clear that the demand for and the price of a service unit of a consumer's good will 50 00:04:39.540 --> 00:04:45.560 be determined on exactly the same principles as those set forth in the preceding analysis 51 00:04:45.560 --> 00:04:47.600 of this chapter. 52 00:04:47.600 --> 00:04:53.680 A durable consumer's good embodies service units as they will accrue over a period of 53 00:04:53.680 --> 00:05:00.160 time, thus suppose that a house is expected to have a life of 20 years. Assume that a 54 00:05:00.160 --> 00:05:06.480 year's rental of the house has a market price as determined by the market supply and demand 55 00:05:06.480 --> 00:05:13.720 schedules of 10 ounces of gold. Now what will be the market price of the house itself should 56 00:05:13.720 --> 00:05:20.720 it be sold? Since the annual rental price is 10 ounces, and if this rental is expected 57 00:05:20.720 --> 00:05:29.880 to continue, the buyer of the house will obtain what amounts to 20 x 10 or 200 ounces of prospective 58 00:05:29.880 --> 00:05:31.720 rental income. 59 00:05:31.720 --> 00:05:38.040 The price of the house as a whole will tend inexorably to equal the present value of the 60 00:05:38.040 --> 00:05:40.000 200 ounces. 61 00:05:40.000 --> 00:05:45.980 Let us assume, for convenience at this point, that there is no phenomenon of time preference 62 00:05:45.980 --> 00:05:52.660 and that the present value of 200 ounces is therefore equal to 200 ounces. 63 00:05:52.660 --> 00:05:59.300 In that case, the price of the house as a whole will tend to equal 200 ounces. 64 00:05:59.300 --> 00:06:04.700 Suppose that the market price of the house as a whole is 180 ounces. 65 00:06:04.700 --> 00:06:09.900 In that case, there will be a rush to buy the house, since there is an expected monetary 66 00:06:09.900 --> 00:06:25.660 This action is similar to speculative purchasers buying a good and expecting to resell at 67 00:06:25.660 --> 00:06:27.540 a higher price. 68 00:06:27.540 --> 00:06:33.700 On the other hand, there will be a great reluctance by the present owners of such houses, or of 69 00:06:33.700 --> 00:06:39.900 The house, if there is no other house judged by the market as the same good, to sell at 70 00:06:39.900 --> 00:06:45.300 that price, since it is far more profitable to rent it out than to sell it. 71 00:06:45.300 --> 00:06:51.500 Thus, under these conditions, there will be a considerable excess of demand over supply 72 00:06:51.500 --> 00:06:57.140 of this type of house for sale, at a price of 180 ounces. 73 00:06:57.140 --> 00:07:03.420 The upbidding of the excess demand tends to raise the price toward 200. 74 00:07:03.420 --> 00:07:08.180 On the other hand, suppose that the market price is above 200. 75 00:07:08.180 --> 00:07:13.620 In that case, there will be a paucity of demand to purchase since it would be cheaper to pay 76 00:07:13.620 --> 00:07:17.640 rental for it instead of paying the sum to purchase it. 77 00:07:17.640 --> 00:07:23.340 On the contrary, possessors will be eager to sell the house rather than rent it out 78 00:07:23.340 --> 00:07:26.300 since the price for sale is better. 79 00:07:26.300 --> 00:07:35.300 The excess supply over demand at a price over 200 will drive the price down to the equilibrium point. 80 00:07:35.300 --> 00:07:46.300 Thus, while every type of market price is determined as in the foregoing sections of this chapter, the market also determines price relations. 81 00:07:46.300 --> 00:07:51.580 We see that there is a definite relationship between the price of the unit services of 82 00:07:51.580 --> 00:07:56.580 a durable consumer's good and the price of the good as a whole. 83 00:07:56.580 --> 00:08:02.780 If that relationship is disturbed or does not apply at any particular time, the actions 84 00:08:02.780 --> 00:08:08.640 of individuals on the market will tend to establish it, because prospects of monetary 85 00:08:08.640 --> 00:08:16.280 gain arise until it is established, and action to obtain such gain inevitably tends to elude 86 00:08:16.280 --> 00:08:26.280 This is a case of arbitrage in the same sense as the establishment of one price for a good on the market. 87 00:08:26.280 --> 00:08:33.280 If two prices for one good exist, people will tend to rush to purchase in the cheaper market 88 00:08:33.280 --> 00:08:41.280 and sell more of the good in the more expensive market until the play of supply and demand on each market 89 00:08:41.280 --> 00:08:47.160 establishes an equilibrium price and eliminates the arbitrage opportunity. 90 00:08:47.160 --> 00:08:53.560 In the case of the durable good and its services, there is an equilibrium price relation which 91 00:08:53.560 --> 00:08:56.180 the market tends to establish. 92 00:08:56.180 --> 00:09:01.960 The market price of the good as a whole is equal to the present value of the sum of its 93 00:09:01.960 --> 00:09:07.420 expected future rental incomes or rental prices. 94 00:09:07.420 --> 00:09:13.260 The expected future rental incomes are, of course, not necessarily a simple extrapolation 95 00:09:13.260 --> 00:09:15.780 of present rental prices. 96 00:09:15.780 --> 00:09:21.880 Indeed, since prices are always changing, it will almost always be the case that rental 97 00:09:21.880 --> 00:09:24.780 prices will change in the future. 98 00:09:24.780 --> 00:09:31.100 When a person buys a durable good, he is buying its services for a length of time extending 99 00:09:31.100 --> 00:09:32.380 into the future. 100 00:09:32.380 --> 00:09:37.300 Hence, he is more concerned with future than with present rates. 101 00:09:37.300 --> 00:09:42.600 He merely takes the latter as a possible guide to the future. 102 00:09:42.600 --> 00:09:49.640 It needs to be kept in mind that strictly there is no such thing as a present price established 103 00:09:49.640 --> 00:09:51.160 by the market. 104 00:09:51.160 --> 00:09:56.760 When a man considers the price of a good, he is considering that price agreed upon in 105 00:09:56.760 --> 00:10:00.640 the last recorded transaction in the market. 106 00:10:00.640 --> 00:10:07.680 The present price is always, in reality, the historically recorded price of the most immediate 107 00:10:07.680 --> 00:10:11.100 past, say, a half hour ago. 108 00:10:11.100 --> 00:10:18.900 What always interests the actor is what various prices will be at various times in the future. 109 00:10:18.900 --> 00:10:24.640 Now suppose that the individuals on the market generally estimate that rents for this house 110 00:10:24.640 --> 00:10:29.960 over the next decade or so will be much lower than at present. 111 00:10:29.960 --> 00:10:36.740 The price of the house will then not be twenty times ten ounces, but some correspondingly 112 00:10:36.740 --> 00:10:39.200 smaller amount. 113 00:10:39.200 --> 00:10:45.680 At this point we shall define the price of the good as whole as its capital value on 114 00:10:45.680 --> 00:10:52.320 the market, even though there is risk of confusion with the concept of capital good. 115 00:10:52.320 --> 00:10:59.680 The capital value of any good, be it consumers or capital good or nature-given factor, is 116 00:10:59.680 --> 00:11:06.360 The money price which, as a durable good, it presently sells for on the market. 117 00:11:06.360 --> 00:11:11.720 The concept applies to durable goods embodying future services. 118 00:11:11.720 --> 00:11:18.080 The capital value of a consumer's good will tend to equal the present value of the sum 119 00:11:18.080 --> 00:11:21.280 of expected unit rentals. 120 00:11:21.280 --> 00:11:28.440 The capital value at any time is based on expectations of future rental prices. 121 00:11:28.440 --> 00:11:32.440 What happens when these expectations are erroneous? 122 00:11:32.440 --> 00:11:37.520 Suppose for example that the market expects the rental prices of this house to increase 123 00:11:37.520 --> 00:11:44.840 in the next few years and therefore sets the capital value higher than 200 ounces. 124 00:11:44.840 --> 00:11:49.720 Suppose further that the rental prices actually decline instead. 125 00:11:49.720 --> 00:11:55.320 This means that the original capital value on the market had overestimated the rental 126 00:11:55.320 --> 00:11:57.560 All Income from the House. 127 00:11:57.560 --> 00:12:03.200 Those who had sold the house at, say, 250 have gained, while those who bought the house 128 00:12:03.200 --> 00:12:06.960 in order to rent it out have lost on the transaction. 129 00:12:06.960 --> 00:12:13.680 Thus, those who have forecast better than their fellows gain, while the poorer forecasters 130 00:12:13.680 --> 00:12:18.140 lose as a result of their speculative transactions. 131 00:12:18.140 --> 00:12:24.860 It is obvious that such monetary profits come not simply from correct forecasting, but from 132 00:12:24.860 --> 00:12:29.220 From Forecasting More Correctly Than Other Individuals 133 00:12:29.220 --> 00:12:35.260 If all the individuals had forecast correctly, then the original capital value would have 134 00:12:35.260 --> 00:12:42.940 been below 200, say 150, to account for the eventually lower rental prices. 135 00:12:42.940 --> 00:12:47.720 In that case, no such monetary profit would have appeared. 136 00:12:47.720 --> 00:12:53.880 The concept of monetary profit and loss, and their relation to capitalization, will be 137 00:12:53.880 --> 00:12:56.120 be explored later. 138 00:12:56.120 --> 00:13:02.040 It should be clear that the gains or losses are the consequences of the freely undertaken 139 00:13:02.040 --> 00:13:05.720 action of the gainers and losers themselves. 140 00:13:05.720 --> 00:13:12.080 The man who has bought a good to rent out at what proves to be an excessive capital value 141 00:13:12.080 --> 00:13:18.600 has only himself to blame for being overly optimistic about the monetary return on his 142 00:13:18.600 --> 00:13:19.920 investment. 143 00:13:19.920 --> 00:13:26.120 The man who sells at a capital value higher than the eventual rental income is rewarded 144 00:13:26.120 --> 00:13:32.000 for his sagacity through decisions voluntarily taken by all parties. 145 00:13:32.000 --> 00:13:39.440 And since successful forecasters are, in effect, rewarded and poor ones penalized, and in proportion 146 00:13:39.440 --> 00:13:45.840 to good and poor judgment respectively, the market tends to establish and maintain as 147 00:13:45.840 --> 00:13:52.100 is high a quality of forecasting as is humanly possible to achieve. 148 00:13:52.100 --> 00:13:58.140 The equilibrium relation between the capital value on the market and the sum of expected 149 00:13:58.140 --> 00:14:06.100 future rents is a day-to-day equilibrium that tends always to be set by the market. 150 00:14:06.100 --> 00:14:13.920 It is similar to the day-to-day market equilibrium price for a good set by supply and demand. 151 00:14:13.920 --> 00:14:20.360 On the other hand, the equilibrium relation between present capital value and actual future 152 00:14:20.360 --> 00:14:27.840 rents is only a long-range tendency fostered by the market's encouragement of successful 153 00:14:27.840 --> 00:14:29.200 forecasters. 154 00:14:29.200 --> 00:14:36.440 This relation is a final equilibrium, similar to the final equilibrium prices that set the 155 00:14:36.440 --> 00:14:41.360 goal toward which the day-to-day prices tend. 156 00:14:41.360 --> 00:14:48.160 The theory of capital value and rental prices requires additional supply-demand analysis. 157 00:14:48.160 --> 00:14:52.960 The determination of the unit rental price presents no problem. 158 00:14:52.960 --> 00:14:58.720 Price determination of the capital value, however, needs to be modified to account for 159 00:14:58.720 --> 00:15:04.120 this dependence on, and relationship to, the rental price. 160 00:15:04.120 --> 00:15:11.260 The demand for the durable good will now be not only for direct use, but also on the 161 00:15:11.260 --> 00:15:16.700 Part of Others Demand for Investment in Future Renting Out 162 00:15:16.700 --> 00:15:22.340 If a man feels that the market price of the capital value of a good is lower than the 163 00:15:22.340 --> 00:15:28.820 income he can obtain from future rentals, he will purchase the good and enter the renting 164 00:15:28.820 --> 00:15:31.260 out market as a supplier. 165 00:15:31.260 --> 00:15:38.220 Similarly, the reserved demand for the good as a whole will be not only for direct use 166 00:15:38.220 --> 00:15:45.580 or for speculative price increases, but also for future renting out of the good. 167 00:15:45.580 --> 00:15:51.500 If the possessor of a durable good believes that the selling price, capital value, is 168 00:15:51.500 --> 00:15:58.500 lower than what he can get in rents, he will reserve the supply and rent out the good. 169 00:15:58.500 --> 00:16:04.380 The capital value of the good will be such as to clear the total stock, and the total 170 00:16:04.380 --> 00:16:09.300 All of all these demands for the good will be in equilibrium. 171 00:16:09.300 --> 00:16:16.060 The reserved demand of the buyers will, as before, be due to their reserved demand for 172 00:16:16.060 --> 00:16:22.040 money, while the sellers of both the good as a whole and of its unit services will be 173 00:16:22.040 --> 00:16:25.380 demanding money in exchange. 174 00:16:25.380 --> 00:16:31.340 In other words, for any consumer's good, the possessors have the choice of either consuming 175 00:16:31.340 --> 00:16:37.380 Using It Directly or Selling It for Money In the case of durable consumers' goods, 176 00:16:37.380 --> 00:16:41.700 the possessors can do any one of the following with the good. 177 00:16:41.700 --> 00:16:48.960 Use it directly, sell it whole, or hire it out, selling its unit services over a period 178 00:16:48.960 --> 00:16:50.280 of time. 179 00:16:50.280 --> 00:16:56.580 We have already seen that if using it directly is highest on his value scale, then the man 180 00:16:56.580 --> 00:17:00.920 uses the good and reserves his stock from the market. 181 00:17:00.920 --> 00:17:06.740 If selling it whole is highest on his value scale, he enters the capital market for the 182 00:17:06.740 --> 00:17:08.940 good as a supplier. 183 00:17:08.940 --> 00:17:14.680 If renting it out is highest on his value scale, then he enters the renting market for 184 00:17:14.680 --> 00:17:17.300 the good as a supplier. 185 00:17:17.300 --> 00:17:23.280 Which of these latter alternatives will be higher on his value scale depends on his estimate 186 00:17:23.280 --> 00:17:27.480 of which course will yield him the higher money income. 187 00:17:27.480 --> 00:17:33.900 The greater the expected income, the less will be the amount reserved for direct use. 188 00:17:33.900 --> 00:17:38.760 It is clear that the supply schedules on the two markets are interconnected. 189 00:17:38.760 --> 00:17:44.940 They will tend to come into equilibrium when the equilibrium price relation is established 190 00:17:44.940 --> 00:17:46.380 between them. 191 00:17:46.380 --> 00:17:52.860 Similarly, the non-possessors of a good at any given time will choose between a. 192 00:17:52.860 --> 00:18:00.900 not buying it and reserving their money, buying it outright, and renting it. 193 00:18:00.900 --> 00:18:06.540 They will choose the course highest on their value scales, which depends partially on their 194 00:18:06.540 --> 00:18:12.680 demand for money and on their estimate of which type of purchase will be cheaper. 195 00:18:12.680 --> 00:18:18.420 If they decide to buy, they will buy on what they estimate is the cheaper market. 196 00:18:18.420 --> 00:18:24.220 Then they can either use the good directly or resell it on the more expensive market. 197 00:18:24.220 --> 00:18:31.140 Thus, if the capital value of the house is 200 and a buyer estimates that total rental 198 00:18:31.140 --> 00:18:39.020 prices will be 220, he buys outright at 200, after which he may either use it directly 199 00:18:39.020 --> 00:18:43.980 or enter the rental market as a supplier in order to pay ounces. 200 00:18:43.980 --> 00:18:48.700 The latter choice, again, depends on his value scale. 201 00:18:48.700 --> 00:18:55.580 Here it must be pointed out that in some cases the renting contract itself takes on the characteristics 202 00:18:55.580 --> 00:19:02.700 of a capital contract and the estimating of future return, such is the case of a long-term 203 00:19:02.700 --> 00:19:04.460 renting contract. 204 00:19:04.460 --> 00:19:11.920 Suppose that A is planning to rent a house to B for 30 years at a set annual price, then 205 00:19:11.920 --> 00:19:19.360 Instead of continual changes in rental price, the latter is fixed by the original contract. 206 00:19:19.360 --> 00:19:25.680 Here again, the demand and supply schedules are set according to the various individual 207 00:19:25.680 --> 00:19:31.520 estimates of the changing course of other varying rents for the same type of good. 208 00:19:32.160 --> 00:19:38.640 Thus, if there are two identical houses, and it is expected that the sum of the varying rents on 209 00:19:38.640 --> 00:19:45.800 When house A for the next 30 years will be 300 ounces, then the long-term renting price 210 00:19:45.800 --> 00:19:51.000 for house B will tend to be set at 10 ounces per year. 211 00:19:51.000 --> 00:19:55.240 Here again there is a similar connection between markets. 212 00:19:55.240 --> 00:20:01.120 The price of presently established long-term rents will tend to be equal to the present 213 00:20:01.120 --> 00:20:07.460 value of the sum of the expected fluctuating rents for identical goods. 214 00:20:07.460 --> 00:20:14.220 If the general expectation is that the sum of rents will be 360 ounces, then there will 215 00:20:14.220 --> 00:20:22.580 be a heavy demand for long-term rent purchases at 300 ounces, and a diminished supply for 216 00:20:22.580 --> 00:20:30.180 rent at that price, until the long-term rental price is driven to 12 ounces per year, when 217 00:20:30.180 --> 00:20:32.420 the sum will be the same. 218 00:20:32.420 --> 00:20:38.780 And here again, the ever-present uncertainty of the future causes the more able forecasters 219 00:20:38.780 --> 00:20:43.140 to gain and the less able ones to lose. 220 00:20:43.140 --> 00:20:49.480 In actuality, time preference exists, and the present value of the future rentals is 221 00:20:49.480 --> 00:20:54.820 always less by a certain discount than the sum of these rentals. 222 00:20:54.820 --> 00:21:01.700 If this were not so, the capital value of very durable goods, goods which wear out only 223 00:21:01.700 --> 00:21:05.340 and Money Imperceptibly would be almost infinite. 224 00:21:05.340 --> 00:21:11.420 An estate expected to last and be in demand for hundreds of years would have an almost 225 00:21:11.420 --> 00:21:14.140 infinitely high selling price. 226 00:21:14.140 --> 00:21:20.940 The reason this does not happen is that time preference discounts future goods in accordance 227 00:21:20.940 --> 00:21:24.120 with the length of time being considered. 228 00:21:24.120 --> 00:21:29.140 How the rate of time preference is arrived at will be treated in later chapters. 229 00:21:29.140 --> 00:21:34.580 However, the following is an illustration of the effect of time preference on the capital 230 00:21:34.580 --> 00:21:41.860 value of a good. Assume a durable good expected to last for 10 years with an expected rental 231 00:21:41.860 --> 00:21:48.900 value of 10 ounces each year. If the rate of time preference is 10 percent per annum, 232 00:21:48.900 --> 00:21:55.940 then the future rents and their present value are as follows. In the first year with an expected 233 00:22:55.940 --> 00:23:05.940 The present value would be 4.4 ounces. In the 9th year, with an expected rent of 10 ounces, the present value would be 4 ounces. 234 00:23:05.940 --> 00:23:13.940 And in the 10th year, with an expected rent of 10 ounces, the present value would be 3.6 ounces. 235 00:23:13.940 --> 00:23:27.940 The sum of these present values equals 59.4 ounces, equals the capital value of the asset, as compared to a sum of 100 ounces of future rent. 236 00:23:27.940 --> 00:23:38.940 As the date of time recedes into the future, the compounded discount becomes greater, finally reducing the present value to a negligible amount. 237 00:23:38.940 --> 00:23:48.940 It is important to recognize that the time preference factor does not, as does relatively correct forecasting of an uncertain situation, 238 00:23:48.940 --> 00:24:00.940 confer monetary profits or losses. If the time preference rate is 10%, purchasing the aforementioned good for 59.4 ounces, 239 00:24:00.940 --> 00:24:30.940 In general, we may sum up the action of 240 00:24:30.940 --> 00:24:37.500 Entrepreneurs in the field of durable consumers' goods by saying that they will tend to invest 241 00:24:37.500 --> 00:24:44.280 in the outright purchase of already existing durable consumers' goods when they believe 242 00:24:44.280 --> 00:24:50.860 that the present capital value of the good on the market is less than the sum of future 243 00:24:50.860 --> 00:24:55.820 rentals, discounted by time preference, that they will receive. 244 00:24:55.820 --> 00:25:01.460 They will sell such goods outright when they believe that the present capital value is 245 00:25:01.460 --> 00:25:05.900 higher than the discounted sum of future rentals. 246 00:25:05.900 --> 00:25:11.620 Better forecasters will earn profits, and poorer ones will suffer losses. 247 00:25:11.620 --> 00:25:19.820 Insofar as the forecasting is correct, these arbitrage opportunities will tend to disappear. 248 00:25:19.820 --> 00:25:25.900 Although we have analyzed the arbitrage profits and losses of entrepreneurship in the case 249 00:25:25.900 --> 00:25:32.740 of selling outright as against renting, we have yet to unravel fully the laws that govern 250 00:25:32.740 --> 00:25:39.280 entrepreneurial incomes, the incomes that the producers strive to obtain in the process 251 00:25:39.280 --> 00:25:41.000 of production. 252 00:25:41.000 --> 00:25:44.200 This problem will be analyzed in later chapters.