What are the two factors that affect the demand for investment?Are they whether a person is pessimistic about future profits or whether a person is positive about future profits? Are these the two...

What are the two factors that affect the demand for investment?

Are they whether a person is pessimistic about future profits or whether a person is positive about future profits? Are these the two factors?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I guess this depends on the textbook that you are using.  Ones that I have used in the past list as many as 5 influences on the demand for investment.  These are:

  1. What changes people expect in aggregate demand in the future.
  2. What they expect input prices to do and what they expect of other things that affect how much profit they think they will be able to make.
  3. How much of the current capacity is being used.
  4. What changes in technology are going on.
  5. How the government treats investment for tax purposes.

I do not know which two of these your textbook says are "the" two.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Investment in economics refers to economic activity that forgoes consumption today, with the purpose of increasing output in the future. It includes spending on tangible assets such as houses as well in intangible investments such as education.

As mentioned in the answer posted above, different authors may classify factors affecting investment decisions by individual firms or companies in different ways. For example, the answer above lists five such factors. However, economists studying nature of investment in general independent of specific industry, country, or time classify all these factors in three groups. These are:

  1. Demand for output produced by the new investment.
  2. Interest rates and taxes that influence the cost of new investment.
  3. Business expectations about the state of economy.

Whether a person is pessimistic or optimistic about future profits from the investments will very much depend about his or her assessment of the above three factors.

If I had to choose only two of the above three factors, I will opt for the second and the third ones. This is because the first factor - demand for output produced by the new investment -  can also be considered to be a part of third factor. This is because demand of output is substantially influenced by state of economy.

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