Presentation prepared by BBA sem2 student on Investment Demand Curve with help from Macroeconomics book by Mr. H.L. Ahuja. Hope this helps you in understanding the concept.

1. Investment
Demand
Curve
Topics –
• Meaning of Investment
• Types of Investment
• Keynes’s theory of Investment
•Factors causing shift in ID curve Shreyansh Singh
IU1981810053
BBA Semester 2

2. Meaning of INVESTMENT
• When a person buys shares, bonds or debentures of
a public limited company from the market .
Buying of existing shares and bonds by an individual
is merely a financial investment.
Purchase and sale of the shares merely represents the
change in the ownership of assets which already exists
rather the creation of new capital assets.

3. • It is the new addition to the stock of
physical capital such as plant, machines,
trucks, new factories and so on that creates
income and employment.
• Therefore, by real investment we mean the
addition to the stock of physical capital.

4. In ECONOMICS
Investment means the new
expenditure incurred on addition
of capital goods such as machines,
buildings, equipment, tools, etc.
The addition to the stock of physical
capital i.e., net investment raises the
level of aggregate demand which brings
about addition to the level of income
and employment in the economy.

5. Types of INVESTMENT
• (1) Business Fixed Investment (i.e. investment in fixed
capital, such as machines, tools)
• (2) Residential Investment (i.e. investment in
building of houses)
• (3) Inventory Investment (i.e. investment in building
stocks of goods and raw materials).

6. Keynes's Theory of Investment

7. According to him...
ID (Investment Demand) depends upon 2 factors –
1. Marginal Efficiency of Capital (expected rate of profit)
2. Rate of Interest
Example—
If investment undertaken in machines or factories is
expected to fetch 25% rate of profit, while the current rate
of interest is only 15%, then it is obvious that the person
would invest his savings in machinery or factory.

8. • If investment is to be made –
MEC ≥ ROI
• If investment is to be profitable –
MEC > ROI
• Equilibrium of Entrepreneur –
MEC = ROI

9. MEC in General
• At a particular time in an economy the marginal
efficiency of that particular capital asset which
yields the greatest rate of profit, is called the
marginal efficiency of capital in general.
In other words,
• Marginal efficiency of capital in general is the
greatest of all the marginal efficiencies of various
types of capital assets which could be produced
but have not yet been produced.

10. Rate of Interest
• Typically, higher interest rates reduce investment,
because higher rates increase the cost of borrowing
and require investment to have a higher rate of return
to be profitable.
• If the MEC curve is less elastic, Investment demand
will not increase much with the fall in the ROI.
• If the MEC curve is very much elastic, then the
changes in the ROI will bring about large change in
investment demand.

13. MEC when INVESTMENT
• Reason 1 :-
The prospective yields from capital asset fall as
more units are installed and used for production
of a good. Prospective yields decline because
when more quantity of a good is produced with
the greater amount of capital asset, prices of
goods decline.
• Reason 2 :-
The supply price of the capital asset may rise
because the increase in demand for it will bring
about increase in its cost of production.

14. Factors causing shift in Investment
Demand Curve
1. Changes in MEC due to Changes in Expectation
2. Expected Demand for Product
3. Technology and Innovations
4. User Cost of Capital
5. Availability of Credit
6. Fiscal Policy

15. Changes in MEC due to Changes in
Expectation
• Rational calculation about future profitability of
investment – Not possible
• Keynes – Swings of optimism and pessimism of
business class is more important.
• “Animal Spirit” determines investment by
business firms.

16. Expected Demand for Product
• Expected net return on investment depends on
expected demand
• Marginal Efficiency of Investment (net
return on investment) depends on
Consumption Expenditure of households on
products.

17. Technology and Innovations
• Introduction of new improved technology and
new products make it necessary to build new
plants or install new capital equipment
• Advances in technology and new inventions
makes investment more productive.
• Increase in productivity of capital causes the
firms to invest more at a given ROI.

18. User Cost of Capital
• Influences the rate of return on capital
• Depends on real ROI, rate of depreciation,
corporate income tax, investment tax credit
• The lower the ROI, lower corporate income tax,
higher investment tax credit,
the lower will be the user cost of capital which
will increase the rate of return on capital and
stimulate investment.
And vice versa

19. Availability of Credit
• Investment is financed in 3 ways :
1) Borrowing from banks and other financial institutions
2) Raising resources through issue of equity capital
3) Internal savings of the company
• If Central Bank follow tight monetary policy,
credit availability for investment will be less
which will discourage private investment.
• If Central Bank allows expansionary or easy
monetary policy, credit availability from banks
increase which will encourage investment

20. Fiscal Policy
• If Government increases investment and finance
it by borrowing from the open market, this will
raise the ROI which will crowd out private
investment.
• However , if expansionary monetary policy is
adopted simultaneously rate of interest will not
rise and therefore crowding out effect will not
occur.

21. • But there are beneficial effects of expansionary
fiscal policy of the Government as well
• Increase in Government expenditure, say on
infrastructure such as power, communication,
highways, roads will raise the incomes of people
which will through the multiplier effect cause a
significant increase in aggregate demand for
goods produced by the private sector and raise
the profit expectation of business firms. This will
encourage private investment .

22. THANK
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