Investment
- Created by: Francesca Easey
- Created on: 15-04-13 10:37
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- Investment
- Changes in real disposable income
- If real disposable income is increasing, demand for consumer goods and services are also likely to increase
- This may encourage firms to expand their capacity
- However, a rise in disposable income may not be sufficent to encourage firms to invest.
- Firms will also have to believe that a rise in demand will last and their existing capital goods aew not sufficient enough to produce extra output
- If real disposable income is increasing, demand for consumer goods and services are also likely to increase
- Expectations
- Firms are more likely to invest if they feel optimistic about future economic prospects
- The extent and speed of changes in expectations are the main reasons for the volatility of investment
- Capacity Utilisation
- Firms are more likely to invest if they are currently operating close to full capacity
- Corporation tax
- Corporation tax is a tax on firm's profits. A cut will increase the firms profits which can result in higer investment
- The Rate of Interest
- A rise in the interest rate would be likely to reduce investment
- It will increase the opportunity cost of investment e.g. the profits could be gaining higher interest in the bank
- A higher interest rate would make it more expensive to borrow and may discourage investment
- A change in the rate of interest would effect the cost of investment
- A rise in interest rates reduces demand for shares
- Advances in Technology
- A firm may buy new capital equipment if it thinks it will produce better quality/ more efficient products
- In both cases the firm would anticipate higher demand/ more products that are cheaper to produce. This will increase profit and encourage competition
- Changes in real disposable income
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