Production and Investment
The focus in this chapter is on the role of capital in production and the relationship between demand, short-run marginal cost, and investment. The point of departure is the simple truism, noted in Chap. 1, that current demand has to be served from current capacity, which is fixed. Current production decisions, accordingly, involve the choice of how much of current capacity is to be utilized. This depends upon expectations of current demands in relation to current short-run avoidable costs of production. Current investment decisions, in contrast, depend upon demands expected in the future in relation to the expected short-run avoidable costs of operating the capacity, which is expected to be available for serving those demands.
KeywordsInvestment Decision Planning Horizon Current Period Natural Rate Government Bond
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