1. Investment
Chapter 9

2. What is Economic Investment?
Who invests? What do they invest in? How does investment affect economic growth?

3. Capital Physical Capital (Capital goods) Human Capital Factories
Machines
Tools
Inventories
Human Capital
Quality of labor resources

4. Interest Rate - Investment Relationship
The investment decision is a marginal benefit- marginal cost decision
The marginal benefit from investment is the expected rate of return (ROR)
The marginal cost is the interest rate (i)
Must be paid for borrowed funds
Opportunity cost if not borrowed

5. Expected Rate of Return
Businesses only make investments when they expect to receive profits.
ROR = (revenue – amount invested) / amount invested
Firms should invest if ROR ≥ i

6. Example
Example: A firm wants to spend $1000 on a machine. The machine lasts one year and total revenue from the machine is $ The interest rate is 6%.
Should the firm make this investment?
What if the interest rate increased to 8%?

7. Example
Example: A farmer wants to spend $4000 on a tractor. The tractor lasts one year and total revenue from the tractor is $ The interest rate is 6%.
Should the farmer make this investment?
What if the interest rate decreased to 4%?

8. Investment Demand Curve
This curve shows the amount of investment at each interest rate.
The level of investment depends on the expected rate of return and the interest rate.
There is an inverse relationship between the interest rate (price) and dollar quantity of investment demanded

9. Shifts of the Curve Acquisition, maintenance and operating costs
Business taxes
Technological change
Stock of capital goods on hand
Expectations