Managerial Economics

Chapter 21

Theories of Investment Spending

After studying this chapter, you should be able to understand:

• Investment can be defined as the value of that portion of an economy’s output for any time that takes the form of new producer’s durable equipment, new structures and the change in inventories.
• To arrive at net investment, a deduction is made from gross investment for producer’s durable equipments and the existing structures that are used in the production process.
• The decision to invest is different when compared with the decision to buy consumer goods.
• Once the marginal efficiency of capital (MEC) is determined, a comparison of the market rate of interest with the MEC will enable one to make a decision as to whether the investment ...