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Interest, the cost of money

Capital in a free market is allocated via the price system. The interest rate is the price to borrow money as debt. When capital is raised as equity, investors expect to receive dividends and capital gains. The sum of these two sources of capital is the cost of equity.

The four key factors that control the supply/demand for capital are:

Production Opportunity

The returns possible from the investment in productive assets, are production opportunities

Time Preferences for Consumption

Consumer preference for saving verses consuming


The chance the invest will not return as expected


The amount by which prices increase / time