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Unit 3: Rate of Return, Investment Demand, Disposable Income

Investment: money spent or expenditures on new plants (factories), capital equipment  (machinery), technology (hardware and software), new homes, inventories (goods sold by producers)
Expected Rate of Return:
-How does business make investment?
Cost / benefit analysis
-How does business determine benefits? Expected rate of return
-How does business count the cost?
Interest costs
-How does business determine amount of investment they undertake?
Compare expected rate of return to interest cost (return > interest cost : invest // return < interest cost: don't invest)
-What determines cost of investment decision? Real Interest Rate (r%)
Investment Demand Curve (ID)
- What is the shape of investment demand curve? Downward sloping
-Why? When interest rates are high, fewer investments are profitable; when low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return

Disposable Income (DI):
Income after total taxes or net income; DI = gross income taxes; With disposable income, household can either: consume  (spend money on goods and services), save (not spend money on goods and services); household spending; ability to consume is constrained by: amount of disposable income and prosperity to save; do households consume if DI=0? Autonomous consumption and dissaying
Saving: household NOT spending; ability to save is constrained by: amount of DI and propensity to consume; do households save if DI=0? No
APC & APS:
APC+APS=1
1-APC=APS
1-APS=APC
APC>1 : Dissaving
-APS : Dissaving


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