2/21/2017

What is investment?
Money spent or expenditures on:
New plants ( factories),
Capital equipment (machinery),
Technology (hardware and software),
New homes,
Inventories (good sold by producers)

Expect Rates of Return
How does business make investment decisions?
cost/benefit analysis
How does business determine the benefits?
expected rate of return
How does business count the cost?
interest rate
How does business determine the amount of investment they undertake?
Compare expected rate of return to interest cost if expected return > interest cost, then do not invest

Real (r%) v Nominal (n%)

What is the difference? Nominal is the  observable rate of interest
Real subtract out inflation and is only know ex post Fatco
What then determines the cost an investment decision?

The real interest rate (r%)

Investment Demand Curve
What is the shape of the investment demand curve?
-downward sloping

Shifts in investment Demand
-cost of production 
-business taxes
-Technological change 
-stock of capital
-expectations 

Aggregate supply
The level of real GDP that firms will produce at each price level (PL)

Long run period of time where input prices are completely flexible and adjust to changes in the price level
In the long-run the level of Real GDP supplied is in dependent of the price- level

Short run period of time where input minus are sticky and do not adjust to changes in the price level
In the short run the level of real GDP supplied directly related to the price level

Long Run Aggregate Supply
The long run Aggregate supply or LRAS marks the level of full employment in the economy (analogous to PPC)

Short Run Aggregate Supply
Because input prices are sticky in the short run, the SRAS is upward sloping

Changes in SRAS
an increase in SRAS is seen shift to the right ->
a decrease in SRAS is seen as a shift to the left SRAS <-

The key understanding shifts in SRAS is per unit cost of production
Per unit production cost equals Total input cost/ Total output

Determinants of SRAS to shift
-input prices
-productivity 
-Legal-institutional environment

Input prices
domestic resources (in the U.S) 
-wages (75% of all business costs)
-cost of capital
-raw materials (commodity prices)

Foreign Resources Power
Strong $= lower foreign resources prices
Weak $= higher foreign resources prices

Market Power
-monopolies and cartels that control resources
control the price of these resources

Increase in resource prices = SRAS <=
Decrease in resource prices = SRAS => 

Productivity = Total output/ Total Inputs
More Productivity = Lower unit Production cost = SRAS =>
Lower Productivity = Higher unit Production cost = SRAS <=

Legal institutional

Taxes and Subsides
Taxes( $ to government) on business increase in per unit production cost = SRAS <=
Subsides ( $ to government) to business reduce per unit production cost = SRAS =>

Government Regulation 
-Government regulation creates a cost of compliance = SRAS <=
-Deregulation reduces compliance cost = SRAS =>