Edited by Dimitri B. Papadimitriou
Chapter 5: Cost Curves and Investment
The eﬀect of a change in National Income, operating through a change in household income, is to shift some demand curves for consumption goods. The amount of induced investment (positive or negative) by business ﬁrms depends upon their reaction to the resulting shifts in the demand curves confronting them. This is true not only of the demand for investment goods by consumption goods producers but it is also true of the demand for investment goods by investment goods producers: realized induced investment depends upon the reaction of business ﬁrms to the shifts in their demand curves which are associated with a change of income. It is necessary to distinguish between autonomous and induced investment. Autonomous investment is due to the introduction of new production functions and to changes in the supply conditions of factors of production. In our approach the inﬂuences upon a business ﬁrm are separated into demand conditions and supply conditions. Therefore, autonomous investment initially is due to changes in supply conditions, whereas induced investment initially is due to changes in demand conditions. In our work we are interested in induced investment, even though the ‘autonomy’ of autonomous investment may be questioned. The immediate incentive to invest by a ﬁrm may be due to a change in the relative prices of factors of production. Such investment is induced if the change in the relative prices is due to the repercussions of a change in income whereas such investment is autonomous if changes in the relative prices...
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