Rates of Return Tend Toward Equality : Capital Budgeting and Resource Allocation in Basic Microeconomics

Under competition, the rate of return on investment tends toward equality in all industries. Introductory and intermediate microeconomics textbooks are sketchy in explaining how capital is allocated by financial markets. Capital budgeting techniques, primarily net present value, deserve a more prominent role. This article suggests ways in which financial economics can be integrated into undergraduate courses to illuminate entry into (and exit from) industries in response to profit opportunities, as an essential part of economists' narration of resource allocation in a capitalistic, market economy