An adequate theory of the interdependence between the firm's production, pricing, investment, and financing requires an examination of both its shortrun and long-run behavior. A model of the firm's production decision will not only reflect its selling price consistent with the chosen level of output but will also explain why that price is set at a level adequate to accomplish two objectives. First, net revenues after the deduction of operating costs must be sufficient to provide an acceptable or required rate of return on the money capital invested in the firm. This rate of return must be available after the deduction from revenues of the periodic allocation to a capital asset replacement fund if, in the manner we have emphasized, the firm is to maintain its capital intact. Second, the cash flow generated by the firm will bear a relation to its regular capital investment expenditures. Part of the money capital necessary to finance that investment will be obtained, as a policy decision, from internally generated cash flows. The level at which the firm's selling price is set, as a markup over costs, will therefore need to be large enough to generate those required investable funds. The remaining part of the capital budget will be financed by making new capital issues in the external capital market.

The availability of money capital is brought into relation with the demand for investable funds by the money capital supply-and-demand curves in Figure 11.1.