Presented by Team 4: Tendo

Faith
Shivan
Matet

FACTORS
INFLUENCING
DEMAND FOR
CAPITAL GOODS
What determines a firm’s demand for capital
goods.
 Capital Goods
Capital goods are physical assets that a
company uses in the process to manufacture
products and services that consumers will
later use.

Capital goods include fixed assets, such as

buildings, machinery, equipment, vehicles,
and tools.

Capital goods are also produced for the

service sector, including hair clippers used
by hairstylists and coffee machines for
coffee shops.

Factors influencing demand for capital goods

02
 Analyse what
determines a firm’s
demand for capital
goods.

01
Point 02
Point 03Point 04
Point 05 06 07 08
Point Point Point Point

Price of capital Demand for Profit levels Corporation tax Income Confidence Advances in
Interest rates
goods product levels technology
 Point
01
Price of capital goods

A rise in the price of capital goods will

cause a contraction in demand for
capital goods, whereas an increase in
the price of another factor of
production, particularly labour, may
increase the demand for capital goods.
 Point
02
Demand for product

If the expected demand for the product

produced is high, the output must hence
also be high meaning the more capital
goods needed.

Factors influencing demand for capital goods

 Point
03
Profit levels

If profit levels are high, firms will have

both the ability and the incentive to buy
capital goods.

Factors influencing demand for capital goods

6
 Point
04
Corporation tax

Corporation tax is a tax on profits of

a company.

A cut in corporation tax would also

mean that firms would have more
profit available to plough back into
the business and greater incentive to
do the same.

Factors influencing demand for capital goods

7
 Point
05
Income

Rising real disposable income will

lead to an increase in consumption.
This, in turn, is likely to encourage
firms to invest as they will expect to
sell a higher output in the future.

Factors influencing demand for capital goods

8
 Point
06
Interest rates

A cut in interest rates would also tend to raise

consumption and thereby encourage firms to expand
their capacity. In addition, lower interest rates would
increase investment because they would reduce the
opportunity cost of investing and lower the cost of
borrowing. Firms can use profits to buy more capital
goods instead of depositing them in bank accounts.
With low interest rates, firms would be sacrificing
less interest by buying capital goods. Borrowing to
buy capital goods would also be less costly.

Factors influencing demand for capital goods

9
 Point
07
Confidence levels

Another key influence on

investment is firms’ expectations
about the future. If they are
confident that sales will rise, they
will invest now. In contrast, a rise in
pessimism will result in a decline in
investment.

Factors influencing demand for capital goods

10
 Point
08
Advances in technology

Advances in technology will

increase the productivity of
capital goods. If new and more
efficient machinery is developed,
firms are likely to invest more.

Factors influencing demand for capital goods

11
 Whether a country would benefit from
devoting more resources to producing
more capital goods.

WHY IT MIGHT WHY IT MIGHT NOT

More capital goods will enable more goods and Existing capital goods may be idle
services to be produced
May reduce costs of production May result in fewer jobs

New capital goods may incorporate advanced Structural unemployment

technology
May increase economic growth May involve an opportunity cost

Factors influencing demand for capital goods

12
 lesson summary
1. Which of the following are capital goods: 3. Suggest two reasons why a country would benefit from devoting more
A a chocolate bar resources to producing more capital goods.
B a car
C a farm tractor
D a child’s toy

2. Which of the following would cause an increase in demand for capital goods?
A A decrease in corporation tax
B A fall in disposable income
C A rise in interest rates
D A rise in pessimism

Factors influencing demand for capital goods

13