Edited by Dimitri B. Papadimitriou
Chapter 8: The Effect of Market Structure Upon Induced Investment
8. The eﬀect of market structure upon induced investment 1. INTRODUCTION ‘Direct’1 induced investment by the ﬁrms in an industry is the result of an upward shift in the demand curve for the product. Such induced investment can take the form of either a change in stocks, a change in ‘work in progress’, or a change in plant and equipment. With a ﬁxed plant the level of stocks and work in progress are determined by the level of output. This stock-ﬂow relation has been put into the form of diﬀerence equations.2 There is little doubt of the validity and wellnigh automatic nature of this relation. The questionable relation is between changes in output and changes in plant and equipment. The inventory cycle can follow an accelerator pattern without investment in plant and equipment conforming to the pattern. Major business cycles can be imputed to variations in plant and equipment investment. Hence, if models based upon induced investment are to be the core of business cycle theory, the accelerator must refer to changes in plant and equipment. Such investment can take one of two forms: either existing ﬁrms expand or new ﬁrms enter the industry. The expansion of existing ﬁrms can be identiﬁed as the change in the short run marginal cost curve along a planning curve. For all ﬁrms the planning curves have to contain the eﬀects of both the ﬁnancing conditions and the evaluation of risk associated with debt ﬁnancing. For existing ﬁrms the...
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