SEMESTER III

Name: DISHA JAIN

CLASS: SY. Bcom (A)

ROLL NO: KSBC035

TOPIC: INVESTMENT FUNCTION

MOBILE NO. 9136565145

EMAIL: JDISHA913@GMAIL.COM
 INDEX
SR
NO. CONTENT

1. INTRODUCTION

2. AUTONOMOUS INVESTMENT

3. INDUCED INVESTMENT

4. DIFFERENCE BETWEEN AUTONOMOUS

AND INDUCED INVESTMENT

5. DETERMINANTS OF INVESTMENT

INTRODUCTION
A strategy or concept of economics that helps in identifying the connection between shifts in the
investment patterns of people and other variable factors affecting investment in an economy is
known as Investment Function.

The expenditure incurred to create new capital assets is known as Investment. These capital
assets include buildings, machinery, raw material, equipment, etc. The expenditure on these
assets results in an increase in the economy’s productive capacity. The investment expenditure
can be classified under the heads:

• Induced Investment
• Autonomous Investment

1. Induced Investment
The investment which depends upon the profit expectations and has a direct influence of
income level on it is known as Induced Investment. Induced Investment is income elastic. It
means that the induced investment increases when income increases and vice -versa.
The above graph shows that the induced investment curve II has an upward slope from left to
right. It indicates that as the income increases from OY to OY 1, the investment also increases
from OM to OM1.

2. Autonomous Investment

The investment on which the change in income level does not have any effect and is induced
only by profit motive is known as Autonomous Investment. Autonomous Investment is
income inelastic. It means that if there is a change in income (increase/decrease), the
autonomous investment will remain the same. In general, autonomous investments are made
by the Government in infrastructural activities. However, a country’s level of autonomous
investment depends upon its social, economic, and political conditions. Therefore, the
investment can change when there is a change in technology, or there is a discovery of new
resources, etc.

The above graph shows that the amount of investment remains the same, i.e., OI, no matter
whether the income level in the economy is OY or OY 1.
Difference between Induced Investment and Autonomous Investment
 Determinants of Investment
As per Keynes, the decision to invest in a new project or private investment depends upon
two factors; i.e., Marginal Efficiency of Investment and Rate of Interest.

1. Marginal Efficiency of Investment (MEI):

MEI is the expected rate of return from an additional investment. The following two factors
are required to determine MEI:

• Supply Price: It is the production cost of a new asset of that kind. Simply put, the
supply price is the price at which one can supply or replace the new capital asset. For
example, if old equipment is replaced by equipment of ₹20,000, then ₹20,000 is the
supply price.
• Prospective Yield: It is the net return or net of all costs, which is expected from the
capital asset over its lifetime. For example, if the equipment of ₹20,000 in the
previous example is expected to yield receipts of ₹2,500 and the running expenses
will be ₹500, then the prospective yield will be ₹2,500 – ₹500 = ₹2,000.
2. Rate of Interest (ROI):
It is the cost of borrowing money for financing investment. There is an inverse relationship
between ROI and the volume of investment. If the Rate of Interest is high, then the
investment spending will be less and if the Rate of Interest is low, then the investment
spending will be more.

Comparison between MEI and ROI

To know about the profitability of an investment, a comparison between MEI and ROI is
done. If the Marginal Efficiency of Investment is more than the Rate of Interest, then the
investment is profitable, and if the Marginal Efficiency of Investment is less than the Rate of
Interest, then the investment is not profitable. For example, if a businessman has to pay 10%
rate of interest on the loan and the MEI or expected rate of profit is 15%, then the
businessman will surely invest and will continue to make the investment till the Marginal
Efficiency of Investment becomes equal to Rate of Intere