Theories of investment
The two theories of investment we will be looking at are the
Neoclassical model and the accelerator model. Thereafter we
will proceed to look at other factors that might affect
investment.
The Neoclassical model of Investment
The Neoclassical model basically states that the desired capital
stock depends on two factors, namely the rental cost of capital
and the level of output.
K* = f (rc, Y)
Firms use both capital and labour to produce its output of
goods and services. Given that the objective of the firm is to
maximize profit, how then does the firm decide on the desired
capital stock?
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