Investment Function

USB:MBA – Industry Collaborated Programs
Subject Name- Managerial Economics
Faculty Name: Dr. Vipin Sharma
Investment Function DISCOVER . LEARN . EMPOWER

1
Objective
Investment Function • The course aims to familiarize
the students the concepts of
Markets form Investment
Function it is applicable in the
real world situation.
Course Outcomes
Agenda of the Lecture
CO Title Level
Num 1.Investment?
ber
CO1 To introduce core concepts of Market Remember
2.Types of Investment?
structure Perfect Competition
3.Determinants of Investment.
CO2 To Learn process of Price determination in Remember
the Short Run and the Long Run
CO3 To Learn process of producer’s equilibrium Remember
in the Short Run and the Long Run
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Investment: Meaning
• An investment is an asset or item acquired with

the goal of generating income or appreciation.
• Appreciation refers to an increase in the value of
an asset over time.
• When an individual purchases a good as an
investment, the intent is not to consume the good
but rather to use it in the future to create wealth.
Autonomous & Induced Investment-:
• Autonomous Investment: The investment which does not depend on the profit motive.
Usually it is done by the government to kickstart the economy in absence of private
investment. The Autonomous investment curve is parallel to ‘X’ axis.
• Induced Investment: The investment which depends upon the profit motive or level of
income. Usually undertaken by private individuals.
Real & Net Investment-:
• Gross Investment is referred to as the total expenditure that

is made for buying capital goods over a time period, without
accounting for depreciation. In other words, gross investment
is the amount that a company has invested in particular
assets or the business as a whole without considering
depreciation for the same.
• Net Investment, on other hand, is the actual addition that is
made to capital stock in a given period. Net Investment takes
into account the depreciation and is calculated by subtracting
the depreciation from the gross investment.
• Net Investment = Gross Investment – Depreciation
Or Depreciation = Gross - Net
Investment Function-:
The investment function refers to investment -interest rate
relationship. There is a functional and inverse relationship between
rate of interest and investment. The investment function slopes
downward.
I = f (r)
I= Investment (Dependent variable)
r = Rate of interest (Independent variable)
Determinants of Investment:
Classical View-:
The classical economists believed that investment depended exclusively on rate of
interest. In reality investment decision depends on a number of factors. They are as
follows:
1. Rate of interest 2. Level of uncertainty
3. Political environment
4. Rate of growth of population
7. Level of income of investors 5. Stock of capital goods
8. Inventions and innovations 6. Necessity of new products
9. Consumer demand
10. Policy of the state
11. Availability of capital
12. Liquid assets of the investors
Determinants of Investment:
Keynesian View-:
Keynes contended that business expectations and profits are more important in
deciding investment. He also pointed out that investment depends on MEC
(Marginal Efficiency of Capital) and rate of interest.
i. Private investment is an increase in the capital stock such as buying a factory
or machine.
The marginal efficiency of capital (MEC) states the rate of return on an
investment project. Specifically, it refers to the annual percentage yield (output)
earned by the last additional unit of capital.
ii. If the marginal efficiency of capital is 5% and interest rates is 4%, then it is
worth borrowing at 4% to get an expected increase in output of 5%.
Investment curve is
downward sloping showing
a negative relationship
between rate of interest
and investment level.
Higher the ‘r’ = Lower the
investment
Lower the ‘r’ = Higher the
investment
References
•D.N. Dwivedi, “Managerial Economic”, Vikas Publications, New Delhi.

•D. Salvatore, “Microeconomic Theory”, Tata McGraw Hill.
•D.M. Mithani, Managerial Economics Theory and Applications, Himalaya Publication, Bangalore.
•Mankiw Gregory N. (1998) : Principles of Economics, 3rd Edition, Thomson, 3rd Indian Reprint (2007).
• Pindyck, Robert S., Rubinfel : Micro-Economics, Prentice Hall of India, New Delhi.
•Daniel, L. and Gupta, P.L. (2006) 3. Maddala, G.S. and Miler Ellen : Micro-Economic Theory and Applications
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REFERENCES
• Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi.
• Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai.
• http://www.economicsdiscussion.net/production-function/production-function-meaning-definitions-and-features/6892
• https://www.toppr.com/guides/economics/production-and-costs/production-function/
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THANK YOU
For queries
Email: vipin.e9155@cumail.in
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USB:MBA – Industry Collaborated Programs

Subject Name- Managerial Economics

Faculty Name: Dr. Vipin Sharma

Investment Function DISCOVER . LEARN . EMPOWER

• An investment is an asset or item acquired with

• Gross Investment is referred to as the total expenditure that

•D.N. Dwivedi, “Managerial Economic”, Vikas Publications, New Delhi.

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