09--Chapter9 Theory of Investment.ppt

Chapter 9
Theory of Investment
0
10
20
30
40
90
91
92
93
94
95
96
97
98
99
00
Topics to be Discussed
Decision of investment
Investment function
Inventory investment & Investment in residential structures
Decision of Investment
Concept of investment
Flow of payout that will increase the stock of capital
Categories of investment:
Fixed business investment
Inventory investment
Investment in residential structures
Decision of Investment
Micro basic( use Fix business investment as an example)
Two procedures of investment decision
Decide desired capital stock;
Get desired capital stock by investment
Decision of Investment
Desired capital stock
Fixed capital stock that can achieve maximal profit when added to other production elements
Principle to decide desired capital stock:
Principle to decide desired capital stock (ignore tax):
Marginal e of capital=price of the capital
Decision of Investment
Principle to decide desired capital stock (take tax into account):
If u=t,tax will not influence investment;
If u>t,tax will encourage investment;
If u<t,tax will hinder investment。
MR(1-t)=MC(1-u)
t is the ratio of tax on profit,u is the favorable term such as tax-cut
MR= [(1-u)/ (1-t)]MC
Decision of Investment
Given Y0,the decision of desired capital stock K*
Rk
MR
MC
Y0
K*
Decision of Investment
When output changes, the decision of desired capital stock
MR
MC
Y0
K*
Y1
K′
Rk
Decision of Investment
From all above, desired capital stock will decided by two elements:
Price to rent capital Rk
Planned output Y
Express by function:
K*=g(Rk,Y)
Decision of Investment
Decide price of renting capital:
Ignore the price change of capital
Consider the price change of capital
Rk=(R+d)Pk
Rk=(R+d)Pk-△Pk