Investment Definition

Investment has dual aspect. It implies the production of new capital goods like plants and equipments. Secondly, a change in inventories or stocks of capital of a firm between two periods.


• There are two determinants — (a) the marginal efficiency of capital (MEC) and (b) the rate of interest.

• MEC implies the prospective yield from the capital asset and the supply price of this asset.

• Symbolically C = Q/P. Where Q is the prospective yield from capital asset and P is the supply of this asset.

• In considering a particular investment project the investor must have some idea of future returns, that is yields from the real asset in its life span.

• To find the present value of all expected future returns we have to discount all future returns.

• Generally there exists a negative relation between interest rate and investment expenditure.

• A fall in the rate of interest may induce an increase in investment expenditure whereas a higher rate, investment is likely to be less.

• At a higher interest rate, a firm instead of using funds for capital equipments may invest in financial assets.

• Thus the level of investment is a negative function of the rate of return.

• Risk, uncertainty and instability tend to discourage business to undertake investment projects.

• A firm may expand investment outlay for innovation viz. introducing a new good or a new technique.

• Innovations either by increasing sale or by reducing cost may help the innovating firm a larger return on its investment.

• Investment decisions are influenced by the cost of capital goods.

• A firm normally calculates the initial cost of acquisition, and the subsequent cost of maintenance and operation of capital goods.

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