Neoclassical theory of investment .pptx
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Neoclassical theory of investment behavior is based on optimal capital accumulation determined by factor prices. Fixed business investment refers to purchases of machines, factories, warehouses, and buildings by businesses. The theory explains how much capital a firm desires at a time and that investment is determined by the speed at which firms adjust their capital stocks to the desired level. According to the theory, investment is determined by the marginal product of capital and the user cost of capital. The marginal product of capital is the extra output from an extra unit of capital while holding labor constant. Firms will add to capital stock as long as the value of marginal product exceeds the user cost of capital.
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Keynes was a 20th century British economist whose ideas revolutionized economic thinking. He argued that free markets do not automatically provide full employment and that aggregate demand determines economic activity. Keynes advocated fiscal and monetary policies like government spending to mitigate recessions and depressions. His ideas were widely adopted and formed the basis of postwar economic policies that achieved strong growth and employment.
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Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time.
Just as an indifference curve represents various combinations of two goods which give a consumer equal amount of satisfaction, an iso-product curve shows all possible combinations of two inputs physically capable of producing a given level of output. Since an iso-product curve represents those combinations which will result in the production of an equal quantity of output, the producer would be indifferent between them.
This law was given by Alfred Marshall in his book principle of economics.
It show particular pattern of change in output when some factor remain fixed.
Production depend upon factors of production , if factors of production are good, production may increase and vice-versa.
Production function show functional relationship between production and factors of production.
It refers to manner of change in output cost by the increase in all the input simultaneously and in the same proportion.
Returns refers to “change in physical output”
Scale refers to “quantity of input employed”
Change in scale means that all factors of production are increased or decreased in same proportion.
The cost advantage that arises with increased output of a product.
It arises because of the inverse relationship between the quantity produced and per-unit fixed cost.
Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them.
The amount received from the sale of goods is known as ‘revenue’ and the expenditure on production of such goods is termed as ‘cost’. The difference between revenue and cost is known as ‘profit’.
For example, if a firm sells goods for Rs. 10 crores after incurring an expenditure of Rs. 7 crores, then profit will be Rs. 3 crores.
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Physiocracy was an economic theory developed in 18th century France that viewed agriculture as the sole source of wealth. Key aspects of Physiocracy included the belief that there is a natural order to the economy governed by natural laws. Agriculture was seen as the only productive sector that created surplus value, while other sectors like manufacturing were seen as sterile. Physiocrats advocated for minimal government intervention, free trade, and a single tax on net agricultural product. Their theories were presented through François Quesnay's Economic Table, which modeled circular cash flows between landowners, farmers, and other classes.
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3) Total variable cost refers to costs of variable inputs that vary with output, such as raw materials and wages. It increases with higher output.
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- Modern theories including the long-run average cost curve and concepts of economies and diseconomies of scale
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- Cost curves are U-shaped as average and marginal costs initially fall then rise due to diminishing returns. Minimum points indicate optimal output levels for firms.
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This document discusses cost concepts and break-even analysis. It defines different types of costs such as explicit, implicit, fixed, and variable costs. It also explains the concepts of normal profit, incremental costs, sunk costs, and private and social costs. The document then provides an introduction to break-even analysis, discussing how to calculate the break-even point, total revenue, total costs, and profit or loss. It demonstrates using an example how to determine the number of units that must be sold to break even. The document concludes by discussing the uses and limitations of break-even analysis.
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pex
CapEx refers to capital expenditures for assets that provide benefits beyond the current tax year, such as new equipment or buildings. OpEx refers to operational expenditures that are incurred regularly to run business operations, such as wages, maintenance, and utilities. While CapEx is deducted over time through depreciation, OpEx is fully deducted in the current accounting period. Most businesses prefer OpEx to reduce taxes, but CapEx may be chosen to increase profits and asset value. Whether CapEx or OpEx is best depends on a business's anticipated growth, access to capital, and technological changes. Effective management of capital expenditures is important, especially during economic crises.
Ozone word
CapEx refers to capital expenditures for assets that provide benefits beyond the current tax year, such as new equipment or buildings. OpEx refers to operational expenditures that are incurred regularly to run business operations, such as wages, maintenance, and utilities. While CapEx is deducted over time through depreciation, OpEx is fully deducted in the year it is incurred. Most businesses prefer OpEx to reduce tax liability, but CapEx may be chosen to increase profits and asset value. Understanding the difference between CapEx and OpEx is important for optimizing finance and expenditures.
Accounts - Costing / Cost accounts
Accounts , Costing , Cost accounts
Capital Revenue , Revenue , Deferred Revenue , Expenditure & Receipts
24 investment
The document summarizes key concepts from Chapter Seventeen of a macroeconomics textbook. It discusses the three main components of investment - business fixed investment, residential investment, and inventory investment. For business fixed investment, it outlines the neoclassical model of investment and how the real interest rate, marginal product of capital, and cost of capital determine the investment function. It also discusses how Tobin's Q ratio and the stock market can influence investment decisions. Residential investment is impacted by housing demand and prices. Inventory investment is explained through the accelerator model where investment depends on changes in output. Throughout, it provides examples of how investment rises during economic booms and falls during recessions.
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- 2. • Neoclassical theory of investment behaviour is based on the neoclassical theory of optimal capital accumulation which is determined by relative prices of factors of production. • It is also called the fixed investment theory. • Fixed business investment refers to the purchase of machines, construction of new factories, warehouses, office buildings etc. by businessmen. • The neoclassical theory explains that at a particular time how much capital stock a firm desires to achieve. Further, according to this theory, rate of investment is determined by the speed with which firms adjust their capital stocks towards the desired level. • Labour – It is determined by the price of the factor and the contributions they make to the production and revenue of the firms.
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- 4. Due to the operation of the law of diminishing returns, marginal product of capital declines as more units of capital are used for production, the other factors being held constant. but it essentially stands for the rental for capital a firm owns or gets it on rent basis and measures the opportunity cost of the funds spent on production or purchase of a capital equipment. The firms try to maximise profits or maximise the present value. Therefore, as long as the value of marginal product of capital (which are in fact marginal receipts or benefits it gets from the use of capital in production) exceeds the rental or user cost capital, it will be profitable for the firm to add to its stock of capital.