- New plants (factories)
- Capital equipment (machinery)
- Technology (hardware & software)
- New Homes
- Inventories (goods sold by producers)
Expected Rates of Return
- How does business make investment decisions?
- Cost/Benefit Analysis
- How does business determine the benefits?
- Expected rate of return
- How does business count the cost?
- Interest costs
- How does business determine the amount of investment they undertake?
- Compare expected rate of return to interest cost
- If expected return > interest cost, then invest
- If expected return < interest cost, then do not invest
What then, determines the cost of an investment decision?
- The real interest rate (r%)
Investment Demand Curve (ID)
- What is the shape of the investment demand curve?
- Downward sloping
- Why?
- When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable
Shifts in Investment Demand
- Cost of Production
- Business Taxes
- Technological Change
- Stock of Capital
- Expectations
A little video to help further understand this topic:
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