Macro- Economics: Investment Function

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Investment Function

Savings and Investment Relationship
Here we will take investment in terms of a schedule giving various amounts of investment associated with various levels of income. The investment schedule is the function of entrepreneurial behavior. It tells us how the investors or producers respond to a change in income or in the interest rate over a given time propensity to invest together with propensity to consume determine the level of income. The investment schedule may be compared with a demand schedule stating the functional relationship of capital outlay at various levels of income or investment. If investment depends upon income, it may be either • Induced Investment

• Autonomous investment
Induced Investment
Induced investment is income-elastic because of short-term profits possibly due to increased demand, the investment curve sloping sharply from the horizontal income axis. [pic]
In this figure curve I represent the induced investment schedule at various levels of income. Autonomous Investment
Autonomous Investment is defined as income-in-elastic investment. It is insensitive to income changes. Autonomous investment is the phenomena commonly associated with a planned economy, where investment decisions are made irrespective of profit or losses. Here the investment curve runs parallel to the horizontal income axis. In other words investment remains constant regardless of income. | |

[pic]
In this figure the curve represents autonomous investment at various levels of income. Logic of Saving and Investment
In the study of national income analysis that = Y or total income is equal to total expenditure. Since investment is expenditure on things other than consumption, so income minus consumption is investment or C I. In the case of savings, it is equal to income minus consumption or Y C = S. In both cases savings and investment are equal to income minus consumption, so we may say S=I. So it is statistically true that saving...
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